Everyone knows that long USD is a crowded trade. The question is, when will the music stop? I for one have been advocating selling dollars here in favor of cheaper, beaten-down currencies. However, I’m not sure the Euro is the one to bottom-fish with.
It’s not hard to lay out the issues facing the Eurozone at the moment.
At the top of the list is Greece and the $340 billion it owes the Troika, the European Commission, the IMF, and the ECB. That’s a lot of money and it’s highly doubtful Greece will ever pay it back. The fact that Syriza has been forced to backtrack on almost all of its fiery rhetoric does not mean the Greek crisis is over. The can has only been kicked down the proverbial road. The world awaits delivery of the promised reforms by the Greek government to the Troika this evening. This deadline in itself is fraught with dangers for the Euro with possible delays and adversarial interaction with Greek creditors, not to mention the leftist furor building in-country against the new government’s surrender to Germany.
But the real problem is that Greece is the first in a long line of countries that have too much debt and probably will never pay it back. Yes, these include the remaining PIIGS but also major bedrock countries of the Eurozone itself, like France. France has continually missed its debt to GDP projections that are required by the Maastricht Treaty of the Eurozone. Late last year, Fitch downgraded France, saying that the measures taken so far will not deal with the French debt problem which is becoming unsustainable. France is the second largest Eurozone economy behind Germany, but it is not growing.
The problem is the same across Europe. Europeans do not want to make their economies competitive through the structural reforms that are needed to make them competitive. Labor reforms, regulatory reforms, et cetera have to be put in place or the anemic growth will continue and the debt burden will continue to grow.
Spain is right behind France with high debt levels and barriers to real reform. Europe simply has lived in an environment for so long where people get everything for free on borrowed money, that the population will simply not stand for reform. This is the long term problem for Europe that has not yet been solved. As long as this problem exists, the Euro will weaken over the long term. Parity is in sight.
Of course, there may be short-term trading opportunities. There exists at the moment a large short position versus the dollar with the euro. This will unwide to some degree at some point. A short squeeze could always pop the euro in the short-term. But that will not allay the issues with the underlying fundamentals of weak structural reform.
On the other hand, European companies are starting to enjoy the fruits of a weak Euro in international trade. The ECB is the last big bank to get on the QE gravy train. The weaker Euro could help Europe grow to some extent but again won’t be the panacea for a European recovery. Only political will for reform can get the continent where it wishes it could be.
So no, I would not be a large buyer of the euro here. There are better opportunities. I would take a look at CAD and AUD to put money, betting on a recovery in commodities, than place good money after bad in EUR. The fundamentals are simply not there but the risks sure are.
L.Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com
