It was just under ten years ago that I was in Spain and Portugal for a vacation and a day of running with the bulls in Pampalona. Unlike most trips to Europe, there was a handy difference. The Euro cost less than $0.90 at the time. It was an extreme low and we know exactly how bad that situation eroded and the Euro reached nearly $1.60 by 2008. Now the range has been more in a level of about $1.30 to $1.50 longer-term, but today we are facing a Euro of $1.365.
This hurts exporters who sell into Europe, and if the Euro weakens too much then sales could drop enough that this would even hurt GDP. Can the Euro’s decline accidentally cause a recession as the economy weakens? It all depends upon by how much, but the answer is “Yes, at least possibly.”
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Now we are seeing calls for a much lower Euro as the panic builds. Whether it is Greece, Italy, Spain, Portugal, or elsewhere, the scares are still there and they are unfortunately still growing. There are no more vacation seasons for Europeans so everyone is back at work. Just on Thursday, there was an unnamed hedge fund manager calling for Dollar-Euro parity again. Almost $1.60 in 2008, now $1.365, and then $1.00?
A more sensible call in a more drawn out timeline came from Nick Bennenbroek at Wells Fargo, who said that the Euro could fall to $1.35 or $1.30 rather quickly. As far as parity, he thinks that would take a prolonged period of maybe 5 years.
Economists, exporters, investors and traders need to remember one thing here about Euro parity. When the Euro launched, the price was $1.18 rather than $1.00. Sure, the Euro fell precipitously and ended up down close to $0.80 about ten years ago at the peak. By our take, True Parity Is $1.18! The technical parity definition is $1.00.
Now that there are talks of more Greek defaults rising and CDS spreads widening out in Europe, along with central bank resignations, where this one falls is unknown. The reality is that it will overshoot at the extreme. All markets overshoot on the way up and on the way down and currencies are no different.
If you are an American, you are already “long the dollar.” The way to play the currency move against a basket without leverage is the PowerShares DB US Dollar Index Bullish (NYSE: UUP). Its 52-week trading range is $20.84 to $24.02.
As far as tracking the Euro, that can easily be done with the CurrencyShares Euro Trust (NYSE: FXE) if you expect the Euro to rise or the ProShares UltraShort Euro (NYSE: EUO) is you are looking for far more downside. These are seeing higher than average trading volume as you would expect.
Switzerland is NOT the Euro, it is better. Still, the CurrencyShares Swiss Franc Trust (NYSE: FXF) is how equity investors play this who do not have currency trading accounts. That is down under $112.00 per share now, and the 52-week trading range is $96.92 to $139.91.
The good news is that Americans can finally travel to Europe again without having what feels like an idiot tax because the currency is so weak. The bad news is that this is likely to hurt exports to Europe, and that can have GDP ramifications if it gets too bad.
JON C. OGG