The euro has strengthened somewhat since last week as German and French leaders meet almost every other day in a bid to take over other the euro area nations through swift financial moves. We are seeing that European nations in a bid to fulfill their extravagant life style are now slowly moving towards a goal for which we had two world wars and loss of millions of lives. However, this new war is bloodless and is allowing few dominant nations to take over the functioning of governments of other weaker nations in the European region. What remains to be seen is that how incentives of the politicians of those weaker nations are aligned so that they hand over the power to a German and French duopoly without even taking into consideration the will of people from respective countries.
Though the euro will not survive even when only German and French are deciding the policies for the whole bloc. This whole exercise is a sham. The euro is a gloss to hide the significant and powerful differences in the basic economies like demographic potential of different countries, geographic potential, educational differences and industrial differences. For example, Germany has more cyclical industries like cars and heavy machinery, France is led by retail industry and Finland has (or had) lead in the technology sector within the euro region. It is just impossible to believe that Germany and France will understand the requirements of each euro country and will be able to determine the budget requirements.
So while this idea sounds good on paper it is impossible to implement unless Germany and France officially take over the governments of the other euro nations.
It is high time for politicians to start thinking about a structured dismantling of the euro rather than try foolish things to keep it together. So we recommend investors to short the euro if it hits $1.36 in the near term. the euro is a good short anywhere above $0.8 (a weighted average of Kiwi, Canadian dollar and Brazilian Real that emulates the industrial weights of European nations) in the long term. We recommend buying EUO and/or DRR if DRR goes below $39 in the next two weeks.
There is another correlation play for the companies which have heavy reliance on the euro strength to support their income. Such names include primarily Priceline.com (NASDAQ:PCLN) and Indian outsourcing firms Infosys (NASDAQ:INFY) and Wipro (NYSE:WIT), European financial firms including Credit Suisse (NYSE:CS), Barclays (NYSE:BCS), solar firms (such as FSLR) as well as some US technology companies including Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). These companies have a positive correlation with the euro for their earnings so any euro weakness will result in lowering their income. So investors can also look to short these stocks as a correlation play to the euro. Apple and Google (GOOG) are particularly attractive as a short plays after their recent run-up last week.
We advise investors to tread euro area cautiously as political gimmicks may create some short term spikes in the euro on the upside. However, the euro is in a secular downtrend until it reaches a fair value of $0.8 if it does survive. So if the euro reaches $1.4 in the short term then it is a definitive short by buying DRR or EUO in the ultra ETFs or by shorting FXE.