One thing I dont quite understand about the EUR is why it decoupled from the rising CDSs and debt problems over the past few months then all the sudden came back. Even netting out USD and QE issues the EUR was strong(against JPY and CHF for instance) It looks like it might recouple but its important to understand that the relationship is unstable I've been thinking about this and I do think there is a sound theory behind a lower EUR. As restructuring fears mount, capital flight takes place, some of that stays within the EU with no fx impact but some head to the US and other places driving the EUR down. Furthermore the bailouts increase gross debt(does anyone know if the loans are senior to the existing debt?this might increase restructuring fears) and austerity by weakening the economy, hurt the banks(inducing capital flight on fears they are not safe). Why the relationship broke down for a while is beyond me
Switzerland by being a haven for capital has a currency that is permanently overvalued on a PPP basis, the EU crisis might lead the EUR to be permanently undervalued on a PPP basis by being hell for capital. At least that is my theory/speculation. Its a bad thing that I was caught on the wrong side of the EUR trade for a while, now that made me shy about speculating against it in a big way, but I might just have to close my eyes and do it. I'd be interested in hearing other people's opinion on the EUR
Because US QE came to the fore for a while, accompanied by hawkish talk from the ECB... There's a sound theory behind a lower EUR and that's simply that there's a risk there will be no more EUR rather sooner than later. All that other bailout malarkey doesn't really matter, in the grand scheme of things. I am pessimistic on the EUR for now, 'cause I think that the coconuts in power only wake up and act decisively when Spain gets pushed to the brink. And that's the optimistic scenario...
Ginormous QE out of the ECB is one possibility. Uncle Axel will probably need to be put in restraints, while this happens. Other than that, maybe the Chinese (through the IMF or unilaterally) step in aggressively (not punily like they did before).
Yeah, getting out of the EUR resembles a massive sell other by citizens and the government so its another factor. But as I said the EUR was strong against everything even the CHF
Couldn't you make the argument that the EUR could skyrocket as greeks, irish, spaniards rush to withdraw euros from their bank accounts ahead of some sort of forced conversion back to a greatly devalued local currency?
I dont see how this would strengthen the EUR, specially because some of this people will prefer gold and USD instead of EURs. The ones that keep their euros wont have an positive impact in the fx(furthermore they will still be forced sellers of those euros once the central bank offers the new currency) Not to mention the bank failures leading to more capital flight. It looks to me once the market starts to price in countries dropping out the EUR would plunge, at least that is my current view
It's simply that sentiment got all one-way against the Euro. People were seriously talking in the summer about the Euro disappearing, not just having problems, but going back to Drachmas etc. There was a huge one-way speculative position short the euro, and there were just no more sellers left, then they got squeezed. Normally it would have just caused the market to go from 1.19 (the low) to maybe 1.30ish, but the QE news from Ben sent it up to the absurd price of 1.40+. It's similar to all those bear market rallies in 2008 before the Lehman failure - each time the VIX got to 35-40 and fear was rampant, the market bounced 10% or so, and it was only once the whole system started wobbling that people stopped buying the dips and full-blown panic selling set in.