Euro: Are We Approaching the Endgame?

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Includes: EWS, EWY, FXA, FXC, FXE
by: Clemens Kownatzki

The demise of the Euro is just about upon us; that is the impression one can get from reading the financial news where the overall majority of economic commentators have been nailing the Euro to the proverbial death-bed. Indeed, it has become more and more difficult to find supporters of the single currency in recent weeks. The easy culprit is of course Greece and some of its Mediterranean neighbors who are at the center of this sovereign debt crisis which has been dragging the Euro lower and lower.

Ultimately, the markets will decide whether the Euro is “toast” or not. In the meantime, there are a few considerations however and before completely writing off Europe and its single currency, let us remember that every crisis also creates an opportunity. One of these potential opportunities from a declining Euro can be seen in last week’s performance of the German Stock Market. The DAX was up nearly 6% for the week. Since this is so relevant and rather timely, I wanted to share some of my sentiments towards the current Euro trashing. The following is part of an email I sent to a friend last week:

The EU certainly has its problems but I am somewhat amazed how all eyes are on Greece when our very own backyard is such a mess too. I have a long list of issues with the whole market mess but just briefly...

California is in a pile of @#$% and other states and municipalities are in big trouble too. I am also slightly amused that New York still has a AAA rating.

The Euro hit a low of 1.2359 today and it looks like it will be testing the 1.2300 area which was the lowest it reached during the financial crisis. I attended a panel discussion yesterday about the very same subject. Concerns about further bad news especially from Spain and Portugal are making it more likely that speculators will continue to push down the Euro.

But just from a trader's gut perspective, we're now approaching a hugely oversold territory on the Euro. While I'm still holding my horses, there might be an opportunity on the horizon. When the sentiment is so bad and everyone is talking about the certain demise of the Euro, that's probably a good time to put on your contrarian hat. It was not long ago when everyone on the street said the US$ was "toast"; we know what happened since.

Looking at things from a different angle, a lower Euro bodes well for the export oriented countries in Europe not just towards the US, but also towards China. By contrast, China's currency being pegged to the US Dollar has a slightly harder time now in terms of exporting their products to Europe at competitive prices. The Euro fell almost 20% against the US Dollar in the past 6 months but that means the Chinese Yuan appreciated against the Euro by the same amount. 20% is a fairly big hit in terms of pricing products competitively.

Yet another thought, China is sitting on somewhere around $2 trillion worth of US$ denominated assets (presumably much more than that as I don't trust those official stats) which are mainly in US Treasuries but also in a vast pool of foreign currency reserves. These reserves are a problem for China and their Central Bank has been actively looking for ways to diversify such a huge one-sided risk. The Euro at these beat-up levels is slowly looking attractive for a long-term play. It may not be in the form of an outright currency purchase; the safer option for them might be German Bunds or Equity.

While this Euro slaughtering is going on, it may be a good time to look into other currencies which are somewhat isolated from general sovereign debt concerns. The typical commodity currencies like [the] Candy, Aussie and Kiwi come to mind with the Aussie Dollar leading the way in terms of a positive interest yield - central bank rates in Australia are at 4.5% now as opposed to 0.25% in the US. But one could also look into other countries which are fundamentally in better shape, possibly Norway and Singapore, maybe Korea (although I must do more homework on that). All those are not without risk of course especially if global demand dries up. But for now, they seem a bit more attractive than a pure Euro/USD currency play.

In terms of trading these via ETFs, the major currencies are available and can be traded just like stocks. So you don't have to lever up 100:1 and trade futures or spot currency contracts. You can trade currency ETFs just like any other ETF via your typical online stock broker.

FXE = Euro, FXA = Aussie Dollar, FXC = Canadian Dollar to name a few.

To my knowledge, there are no ETFs for Singapore $, Norwegian Krona or Korean Won on US Exchanges (found some in the UK though), but there are entire country ETFs for Singapore (NYSEARCA:EWS) and Korea (NYSEARCA:EWY); those would be equity plays with some currency exposure built in.

It is definitely a challenge to try and make some sense of global markets these days. Very poor visibility and plenty more volatility are almost forcing you to stay on the defense for now. Until we see some of the "fog" clearing up it's best to keep your seat belt fastened...

Disclosure: No positions