Given we are at the latest stages of the Greek drama, it is probably a good idea to look at the most important asset that is affected by it, the euro (FXE). Let me admit that I started writing this article hoping to prove that there was a something dysfunctional about our financial markets, as the euro does not seem to be affected by the quantitative easing operation by the ECB. However, when I sifted through some charts, I came to the conclusion that maybe there was justice in our financial markets after all. The cliché aside, although it might seem that euro plays to the developments of the Greek debt swap more than to the ECB actions, the reality does not seem to be that clear.
During the American QE2, the euro has gained approximately 26% from its bottom to top, while the Dow (DIA) has gained about 31%. So almost all of the market gains in the US market were due to the debasement of the currency. Some other indices like the Nasdaq (QQQ) and Russell 2000 (IWM) fared somewhat better, but that was entirely due to the higher risk characteristics of those indices.
If you analyze the developments of the last 5 months, however, the environment is different. From the recent market bottom in October 2011 to recent high of 13,075, we had a similar 24% gain in the American equity market. Still, even in this rising market, the EUR had difficulty keeping its risk-currency status as it trades roughly at the same level as it did back in the October 2011 low.
Another example that the Europeans are going through the same mechanics as the Americans did during QE2 is the outperformance of the German DAX index over other European indices and especially over some American ETFs indexed to European securities -- EWG, EZU, EWI, FEZ, and FEU. In my opinion, it is an indication that the euros printed by the ECB just prop up the German market, which doesn't really need it, rather than helping the southern European states that could really use it.
Investors are of the opinion probably that the ECB LTRO operation will just debase the EUR and will prop up asset prices in Europe. The similarity with the American QE is that, the money injected will fail to solve the fundamental problems, but will just give a temporary boost to the asset prices. However, contrary to popular expectations, established markets like Germany will benefit more, because since the increase in money supply across Europe is the same investors won't take the risk with southern European bourses while the same effect is there in the same amount in the safe German market.
To sum up, although the European LTROs effect seems to be different than the American QE, because EURO is deemed a risk currency, further analysis reveals that the long-term effects could be quite the same. On this basis, EUR is probably a long term short. Especially if the Greek debt deal passes and it gives a short term boost to the EUR to the 1,34 level that might be a good level to initiate the short position. On the other hand, it probably is not a good idea to chase the European ETFs by virtue of the increase in the European indexes. Any outperformance by the European indices will probably be eaten away by a decrease in the value of the EUR.
I should also note that, obviously, the euro is in a very volatile situation, and any further developments in the European debt debacle might change this analysis. I will try to write another article if the European macro fundamentals substantially change. I also try to implement my analysis in this article to trades in my own Global Macro &FX Fund; if you want to follow the performance of the trade-based version of this analysis, you can check here.
Disclosure: I am short FXE.