The Euro Paradox

| About: CurrencyShares Euro (FXE)

There’s an interesting paradox emerging in the EUR/USD exchange rate.

Whenever fears increase of a possible Euro breakup, naturally investors flee the Euro, not knowing what might happen to their positions under such an eventuality. Uncertainty is a sure-fire way for an asset to lose value. And such fears have been abundant of late, with the rising yields on Spanish and Italian debt towards unsustainable levels raising doubts on whether the European Financial Stability Facility (EFSF) is enough to control the situation. Obviously, the ECB showing no signs of stepping up and stabilizing the situation through a commitment towards infinite printing and support helps these fears.

Now, such commitment from the ECB is not possible precisely because Germany opposes it. And herein lays the paradox. Such a lack of commitment to infinite printing increases the risk the Euro might breakup – but the printing itself would also be dilutive of the Euro’s value! Yet, any movement towards allowing it presently would increase the Euro value, because of the way it would control the short term fears of a breakup.

How to profit?

The one thing that has been the real driver of the EUR/USD quote lately is the behavior of the yields in the largest Euro economies ex-Germany. So at the very least, any EUR/USD trader right now has to keep a keen eye on the 10 year yield charts for Spain, Italy … and, something that hasn’t been talked about much, France. As long as these charts keep heading up it’s hard to be long the Euro, but any sudden dips clearly lead to furious buying.

You can find the Bloomberg charts linked below. However, if you’re going to trade on these you’ll need a real time feed.

For a bit of context on what is happening and why it has been so hard for the Euro to gain ground, just take a look at this chart depicting the France-Germany 30 year spread (via Reuters):

click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.