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How To Profit From Another Year End EURUSD Collapse

As September and October have become seen as potential crash seasons for stocks, could the Year-End be developing similar bad vibes for the EURUSD
The overall EURUSD situation is eerily familiar to that of a year ago.
Overwhelming negativity had the EURUSD up around 1.5900 while EU sovereign debt crisis steadily worsened but still remained under the radar of general world markets and the financial press.
Then came the Dubai World scare late November-early December 2009, reminding the world about sovereign debt troubles. Leaders of Europe’s core economies denied there was a serious problem, and delayed taking decisive action to provide aid and calm markets, fearing backlash from their voters who would not tolerate seeing their taxes go to subsidize mismanaged economies. However while EU leaders dithered, confidence the EZ and Euro collapsed, sending borrowing costs for Greece and the other PIIGS soaring and bringing default risk closer. Ultimately, the threat to Europe’s entire banking system (the big banks own a lot of PIIGS bonds) forced them to provide support anyway.
The same cycle of events threatens to repeat itself. German leaders play to frustrated German taxpayers by taking a hard line stance to further aid to the PIIGS, shake confidence in PIIGS bonds, resulting systemic risk to EU banking ultimately forces the very bailout they sought to avoid.
However, that’s what is happening. German officials are calling for PIIGS bondholders to share a portion of the liability in case of restructure/default, predictably shaking confidence in PIIGS bonds, and making another aid package more likely. Note:
  • Irish and Greek 10 year bond yields are again at record highs. There is open speculation if Ireland, burdened with additional bank bailout debt, can conjure up another austerity budget by December 7th or if it will be forced to turn to the IMF.
  • Greece’s Deputy PM openly contradicted official Greek policy by viewing restructure of Greek debt as a realistic option. Was it a gaffe? Perhaps he was just playing to Greek voters ahead of this week’s elections? Or was he sending up a trial balloon? Am I being too suspicious?
  • Similarities between Ireland problems now and those Greece faced last May have been pointed out repeatedly in the financial press -persistent selling pressure on Irish bond yields. Not even EUR 6bln in spending cuts for 2011 calmed markets, raising doubts whether the Irish government can come up with  its 2011 budget by December 7th  without resorting to the IMF/ECB stabilization fund.
Admittedly, the budding crisis atmosphere may be intentionally engineered, as leaders of the EU’s core economies may feel they can justify another aid package to their voters only under threat of another EU collapse.
Or am I just being too suspicious yet again?
A prime lesson of the prior year: if leaders must choose between money printing to fund a bailout and systemic collapse, they’ll go for the bailout as the lesser of economic and political evils.
This past week, ECB head Trichet suggested all was fine( just like this time last year until suddenly,  it wasn’t).
Events To Watch This Week
  • Greek Elections.Any sign that the current socialist government is losing its grip on power may scare debt markets, thus raising the curtain on Act II in the Greek debt tragedy.
  • Q3 GDP figures for much of the EU become critical: especially Spain’s, because it is considered by many to be too big to rescue. Spain reports Thursday. Friday is the big day for EU GDP reports, with Greece, Portugal, and Italy as well as France, Germany and the overall EZ. If growth, especially for the PIIGS, misses expectations, EUR troubles could accelerate even relative to the USD.
As long as the ECB keeps firm to its exit strategy and the Fed pumps the US economy with dollars then risk assets like the EURUSD should continue to strengthen. Markets appear to be anticipating an assault on December 2009 highs around 1.4500. However failure to manage market confidence (or its intentional sabotage) could send the EURUSD plunging.
Oh yes, and most other risk assets as well.
Trader Ramifications
The current EURUSD uptrend is strong, established, has fundamentals and technical justification and thus must be respected. No attempts to fade it. If/when it reverses consider the following:
  • Take profits on stocks, commodities, risk currencies and/or flip to short positions
  • Go long USD, CHF and related AAA bonds