Is It Time to Short the Euro? Yes – It Has Been for Years
Look, I am not a forex trader (so what the hell do I know?) and I don’t feel like taking the evening to build a model for all of this, but here is a video from Bloomberg which asks the question, “is it time to short the euro? and I mean come on, hasn’t it been time to short the euro since about 2009? Here is a chart of the euro vs. the dollar from October 2009 to present:
There aren’t a lot of spots on that graph where, if you shorted the euro from there to the present, you wouldn’t come out ahead. And just for fun, here’s the euro’s performance against the dollar from August 2011 (when it had almost recovered to pre-debt crisis peaks) to present:
Basically, if you got your short on during July and August 2012, you’re out of luck at the moment; otherwise you’d again be firmly in the black. Obviously this is a bit unfair – looking retrospectively like that always is – but if you go back and look at the conditions and catalysts then and the conditions and catalysts now, it’s really difficult to see why the euro has remained as buoyant as it has for as long as it has. Actually, a better way to say that is, the time it’s taken for the financials to converge with the fundamentals is a little shocking.
Before Greece announced they’d been lying about their finances for years and subsequently threw the eurozone into a tailspin from which it’s yet to fully recover, you can kind of understand how the euro was trading at 1.50 to the dollar. It’s not like eurozone economic growth was so exciting as to be driving demand for lots of euros, but the U.S. was in the throes of the Great Recession and the ECB’s main rate was more than a full point higher than the Fed’s. So fair enough if euros were a bit (a lot, even) pricier than the greenback. But then, as the fundamentals would suggest, its value slowly tumbles as the situation in Greece deteriorated throughout the end of 2009 and the first half of 2010; it falls off a freaking cliff after Papandreou formally requested a bailout in April of that year, touching down at just under 1.20 to the dollar in June.
But here’s where it seems the fundamentals and the financials begin to diverge in a major way. By June 2010 the Fed had slashed rates to zero and engaged in an enormous bout of quantitative easing; the ECB’s main rate was still above 1%. So if the fundamentals of the situation (a slowly improving U.S. economy vs. an obviously imploding European one) warranted a stronger dollar, the imbalance in central bank responses presumably goes a long way towards explaining why going on vacation in Europe still, from a monetary perspective, sucked for Americans.
The narrative just gets more preposterous from there – having returned to trading at more than 1.4o to the dollar in August 2011 (gotta love the ECB’s decision to increase the main rate to 1.50 in July of that year) it crashes all the way to 1.21 in July 2012, a fall stemmed only by Draghi’s now-famous “whatever it takes.” You might think that the Eurozone being on the verge of collapse and its survival being dependent on the ECB’s stated willingness to use means the legality of which is now under challenge in the EU’s highest court would correspond with something like a floor on euro weakness against the dollar, but of course you would be wrong.* Because Operation Twist was in full swing, suggesting the Fed’s willingness to pursue additional monetary easing, and the ECB still had its main rate at .75% (you know, to ward off inflation) – presumably the euro still looked pretty attractive by comparison.
The result of all of this (or a result anyway) is you get the chief FX strategist for Scotiabank saying about the euro-dollar rate right now, “we could absolutely go lower than 1.21,” when that’s more or less the lowest it’s ever gotten during the whole crisis so far, including when the entire eurozone was flirting with non-existence. Finally the purely financial side of the equation linking the euro and the dollar has essentially equalized; the eurozone’s benchmark interest rate is effectively zero and the ECB is about to embark on a massive asset buying spree just as the Fed has wound up its own quantitative easing. And so now even a comparatively minor (fears of a mild German recession vs. the eurozone dissolving) deterioration in fundamentals leads to a substantial increase in downside expectations.**
All of which is to say yes, sure, short the euro now. But the fundamentals of the eurozone economy have been screaming for that for literally years. I get that probably most forex trades are not put on with the intention of them lasting five years, but if you’ve waited until now to get really bearish on the euro, you’ve basically been running a bet on the ECB’s continued pigheadedness in keeping rates high and avoiding non-traditional monetary policy like the plague.
*For what it’s worth I’m entirely on Draghi/the ECB’s side here
**To be fair, Scotiabank’s Camilla Sutton does address flows and fundamentals moving in the same direction