There are significant headwinds that the euro will face in the future, and it has captured the eyes of major players such as Goldman Sachs and John Paulson. As reported by Bloomberg, a Goldman Sachs analyst Thomas Stopler, wrote a note stating there are "significant uncertainties" being played out in the eurozone dealing with the Greece bailout. Bloomberg also reported that John Paulson, of Paulson & Co, stated that the euro is "structurally flawed". He also added:
We believe a Greek payment default could be a greater shock to the system than Lehman's failure, immediately causing global economies to contract and markets to decline.
A position that I have been holding since 2010 is Morgan Stanley Short EUR ETN 2X (DRR). The reason that I have held on to this position for a significant amount of time is because the political infrastructure in Europe is fluid, and because the eurozone countries face internal and external political pressure that they can't resolve overnight.
Let's preview a chart of DRR.
Looking at the chart above, we can identify that the euro gained strength against the dollar last year, as it was behind the scenes during the drama being played over on the other side of the Atlantic. America's credit was downgraded for the first time in its history. Now that America is not part of the daily headline news, the markets and world have now focused back their attention on Greece and Europe.
Just a couple days ago, Moody's downgraded six eurozone countries and put United Kingdom, France, and Austria on negative watch. Which has added pressure on the euro, and now we face the unfolding events that are taking place in Greece, which have not helped. Note the headlines that are in the news from the Financial Times, "Eurozone division threaten Greece aid".
We may not know if what John Paulson has said about the euro is accurate, that it may collapse; there are a lot of signals that it may. We do know that the eurozone faces a lot of internal headwinds to solve this crisis with Greece, and other euro nations. It may come to a point that there will be an international bailout of Greece, because as it was pointed out in the Bloomberg article that Paulson believes "such a default could lead to a European banking crisis on par or worse than the world suffered in 2008 when Lehman Brothers failed."
If it comes to that point when there can be another Lehman Brothers, there is no doubt the whole world will come to the rescue.
With that being said, it is of my opinion that the euro will continue to decline and the DRR will test its recent high of $47.99, and it is currently a good play to use on the euro at this time.
Disclosure: I am long DRR.
