The euro zone crisis is far from over, and investors can take advantage by shorting the euro with options on a currency ETF. But before we get to the specific trade, let’s take a look at the trouble brewing in Europe.
Closer scrutiny of the “stress tests” of 91 European banks shows they were faked with even less skill than the United States faked its stress tests. Many banks did not fully or properly disclose exposure to high-risk sovereign debt or to other banks holding that debt.
Meanwhile, with the exception of Germany, European economies are still struggling and showing signs of slowing. Just like the United States, those countries will get their double dip, and their governments are now implementing austerity plans that will only aggravate the economic slowdown.
So, it’s no wonder that traders and investors are losing faith in risky sovereign debt, and Greek bonds are selling at discounts again.
Underlying all of the problems is a two-decade-long slide into stagnation due to demographics and poor government polices outside Great Britain. Knowledge and acceptance of this malaise underpin investors’ attitudes. They know this isn’t about a dynamic growth engine that is simply stalled; it is broken, except in Germany, and even there, the demographics are hitting the economy very hard.
European governments are broke (just like the Uncle Sam) and putting in place austerity plans that will only hurt their economies more. But they have no choice if they are going to protect their bonds and their ability to borrow — so, no more stimulus spending.
Also, European governments cannot print money; that is the job of the European Central Bank (ECB), and it refuses to do so. Once a German takes over the ECB in about a year, there is absolutely no hope of using monetary policy to help the economies of the Ccntinent. German DNA is so inflation-averse it leads to irrational policies in both good and bad times.
The best policy for all these governments is to let the euro slide to boost exports and tourism, and that’s exactly what’s going to happen. Along the way, a major problem (or two) will hit the markets. In particular, I’m talking about the growing problem with Anglo Irish bank, which is in deep trouble, as Ireland, is broker than broke.
The bottom line is that the euro is gong to slide, get hit, slide again, and get hit again.
Once it punches down through $1.20 and stays there, it will be a freefall to a buck, and then maybe even down to the all-time low of 87 cents.
That makes a bearish position in the CurrencyShares Euro Trust (NYSE: FXE) enticing. Option traders should buy the FXE Jan 120 Puts, currently trading around $1.14.
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