Has the EUR hit it's biggest sell since inception?

Has the EUR hit its biggest sell since inception?
Lars Seier Christensen Lars Seier Christensen
co-founder & CEO / Saxo Bank A/S
Denmark
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I have to admit that I have been surprised by the EUR's resilience in recent months. I am sure an army of rear-mirror analysts can provide a logical explanation. But frankly, relatively few of the same group a year ago would have forecast the 1.40-ish level we are seeing in EURUSD lately. Nevertheless, here we are. But that doesn’t change my belief that reality and gravity may finally return to this, the world’s largest market.

Readers of my past blogs and editorials elsewhere will know that I think the EUR is a monumentally bad idea. In fact, if it is possible to hate a financial asset, I hate the EUR. It has created countless victims in its trail, de facto bankrupted multiple countries, lost most of an entire young generation in Southern Europe and lead Europe in the direction of a totalitarian super state. So yes, I hate the EUR. May it disappear one day soon, leaving only a sad and frightening memory of an irresponsible, dangerous experiment that is never to be repeated. It will also leave behind gigantic economic and human costs. But it would be far better to take that unavoidable loss soon, before it becomes impossible to reverse. Recovery will follow much sooner if the root cause of the current malaise is removed.

I admit it would be naive to think that the EUR situation will be resolved anytime soon owing to the vast amount of political capital that has been invested in it. The huge European bureaucracy and especially the political elite that feed off the EU will do all they can to prevent the EUR’s fall, at least until it becomes inevitable. This will be either due to pressure from voters (even if they are very rarely consulted in this post-democratic political structure) or from the markets, which eventually must reassume their role that has been perverted beyond recognition during the crisis: the true role of allocating capital and pricing money and assets rationally.

But if we are stuck with this "Currency of Mass Destruction", shouldn’t we at least try to make some money from it? I think it is a fair assumption that the EUR either has already topped out here ahead of 1.4000, or is at least very close to doing so. In trading terms, that means beginning to build a short position from current levels and adding to it more aggressively in case of a retest of recent highs. Technically, that is not unlikely at all, but I believe any upside from here will be very modest and very short-lived should it happen. Also note that volatility is at very low levels relative to historical norms, so shorting via options is not a bad option for a lower-risk strategy.

Why are we likely near or at the highs for the cycle? I think a number of elements point in that direction:

1. The economy is extremely weak across the entire EU area and the EUR should never have been where it is in the first place.

2. The Eurozone wants the EUR lower — and needs it lower. The ECB is probably less skilled and less inclined to drive down its currency than other central banks, but this level is simply getting too painful even for the complacent ECB.

3. Deflation is right around the corner and I think the probability is much higher than the 20 percent odds being bandied round by the IMF and others.

4. The Bundesbank seems to be giving up on its usual resistance to quantitative easing. Not a good sign at all as they are the only true guardian of healthy money left in a world of competitive devaluation. Nevertheless, it seems to be happening. The alternative is negative interest rates, but either outcome should drive the EUR lower.

5. There will be more and more unrest in Europe as unemployed youth and public sector employees will make up a strange coalition of bedfellows with small-to-medium enterprises (SMEs) as their interests align against the big business / big bank / political elite coalition. Never forget that SMEs create the jobs, but have very limited access to credit.

6. The populations of Europe will continue to rebel against the undemocratic Brussels, trying to force through one hare-brained, intrusive measure after the next. The obvious, and rare, opportunity to express dissent will be the EU Parliament elections in late May. I think the protest movements will do extremely well in the UK, France, Italy and elsewhere.

7. And finally — technically the EUR looks top heavy after the multiple attempts above 1.3800 in EURUSD in recent months couldn’t get anything going to the upside. As well, volatility is simply too low to stay here forever, and there could be strong momentum and trading interest if the EUR breaks to the downside.

So all in all, things are stacking up against the EUR, even without mentioning the unsustainable debt/GDP ratios, the fragile banking system, the geopolitical embarrassment of Europe’s extreme inability to act decisively and the external economic shocks coming from, among others, China and Russia.

The number of things that can go wrong for the EUR are legion. What can go right is hard to imagine. But I have been wrong before, so do your own homework.

We have priced in the different options in the table below with a EURUSD spot reference of 1.3754. You can see the price in vols and in pips for each of the options and the p/l after six months with different achieved spot levels:

Options
Source: Saxo Bank

And here you have the comparison between implied and historical vols for six-month EURUSD:

Options chart
Source: Bloomberg

Six-month 25 Delta RR

Options chart
Source: Bloomberg

Safe trading!
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5d
pulsak pulsak
I totally agree with this article. I think EUR is way too expensive right now, but from the other side, it doesn't want to devaluate (Mr. Drahgi knows what I'm talking about...). Good luck to everyone!
5d
Jim Earls Jim Earls
I am curious to know what is the direct relation between the level of EURUSD and world equity markets. If EURUSD went to 1.30, would world equity markets decline? This is my thesis.
5d
Juhani Huopainen Juhani Huopainen
A risk reversal could be an interesting play. At 1.40+ levels the ECB will intervene at least verbally anyway, and while the risk reversal skew has decreased, EUR puts are still vol 1% more expensive than EUR calls.
4d
carmelominnella carmelominnella
The wild card in the Euro play remains a complacent population in most of the depressed countries. There will be a point where people do not accept permanent economic depression in order to meet the survival criteria of the powerful banking interests. Once forceful opposition begins to mobilize, Euro will test the floor and then all bets are off. The up-coming EU parliamentary elections might be the first salvo in the inevitable confrontations to come.

At last, someone who tells it like it is.!!

Draghi: ECB will unleash stimulus if euro strengthens further
Central bank president says any additional strengthening of single currency would warrant non-standard measures such as quantitative easing
European Central Bank President Mario Draghi
Mr Draghi said last month that the strength of the euro had undermined the ECB's attempts to stabilise the single currency bloc Photo: Getty Images
By Szu Ping Chan, in Washington9:37PM BST 12 Apr 2014 Comments36 Comments
Further strengthening of the euro will prompt the European Central Bank (ECB) to launch a fresh wave of stimulus in order to maintain its loose policy stance and fight low inflation, its president has said.
Mario Draghi said the single currency, which has appreciated by 14pc against the dollar since July 2012, had helped to push eurozone inflation down to a four-year low of 0.5pc in March.
Mr Draghi added that any further strengthening would warrant further action by the ECB, including non-standard measures such as quantitative easing.
"Over the past few months [the exchange rate] has become more and more important for price stability, Mr Draghi said at the International Monetary Fund (IMF) spring meeting on Saturday.
"We are aware it's not the only element, but it has been an important element. So in a sense if you want monetary policy to remain as accommodative as it is today, a further strengthening of the exchange rate ... would require further monetary policy stimulus."
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Mr Draghi said last month that the strength of the euro had undermined the ECB's attempts to stabilise the single currency bloc.
He emphasised on Saturday that the euro exchange rate was not a policy target and declined to state a specific level that would trigger further stimulus.
However, Mr Draghi said the strength of the single currency had reduced eurozone inflation by between 0.4 and 0.5 percentage points. Inflation has dropped from 2.7pc in the first quarter of 2012 to a current level of just 0.5pc.
Lower food and energy prices were also major factors keeping inflation low, Mr Draghi said. However, he added that the threat of deflation - or falling prices - was not imminent.
Deflation can pose a danger to economies because if prices are falling people put off spending in anticipation of further falls. It also makes it harder for governments and businesses to reduce debt burdens.
Mr Draghi also said the ECB's forward guidance policy had helped to reduce volatility in the eurozone. However, he said further tightening of US monetary policy could pose risks to the global economy.
"All central banks are aware of the spillovers that their decisions could create for other countries," he said.
Mr Draghi added that countries with fragile economies were more likely to suffer from further volatility.
"Spillovers might have an incidence upon countries inherently fragile because of their economic policy, or lack of it, and that's been the experience of the last year," he said.http://www.telegraph.co.uk/finance/economics/10763137/Draghi-ECB-will-unleash-stimulus-if-euro-strengthens-further.html