The Euro remains the most traded currency after the United States dollar in the forex market. This year alone, the pair has fallen against major currencies such as the United States dollar and Japanese Yen. Against the dollar, the currency has fallen 9.95% and against the Yen, the currency has fallen 6.2%. In the past 5 years, the pair has fallen 17% against the dollar and I believe that the fall will continue in the next few years. For this reason, I believe that shorting the Euro will return sweet returns on investments to traders and investors. In a recent opinion note by Credit Agricole, suggested that the fall by the Euro would continue for 3 main reasons. One, the continued bond purchases in the Quantitative Easing (QE) program will hit the euro. Secondly, with the impending interest rates hike by the American fed, the dollar will continue gaining momentum. Finally, the increasing inflation in the Euro zone will have a negative influence to the currency.
The Greek crisis is not over
Following the recent deal between Greece and its creditors, the currency gained marginally against the major currencies. However, the fact still remains that Greece is not out of the woods yet. In fact, the IMF has called for the Eurogroup and the European Central Bank (ECB) to offer debt relief to the country which they have refused to accept. For this reason, the country will continue being a thorn in the flesh for the European nations. In fact, many analysts and experts polled by Bloomberg noted that Greece will finally move out of the Euro because of its unsustainable debt situation.
Exit Greece, Enter United Kingdom
Another macro theme in the European Union is on the impending referendum in the United Kingdom. The current United Kingdom prime minister David Cameron was elected in June with a promise of sponsoring a referendum for the country to leave the Eurozone. Recent polls indicates that the most UK citizens believe that exiting the Euro will be a bad thing for the economy. According to a poll by Telegraph, 61% of residents believe in staying in the common currency. While this is good, the fact is that no one really knows what the citizens will vote when the referendum question is asked. Therefore, gearing to the referendum which is scheduled for early 2016, it is expected that the currency will remain low.
In the past few years, the dollar has remained bullish against most of the major currencies. The dollar index which measures the strength of the dollar is currently near the all high positions. After the fed hikes the interest rates later this year, the dollar will continue becoming stronger because it will signal increased confidence in the economy. Therefore, I believe that the rise and rise of the dollar will have a negative impact on the Euro.
Exit by Germany
Germany is the biggest economy in the Eurozone. I believe that Germany will be forced to exit the Euro. Presently, the country is the biggest creditor in countries such as Greece and Italy. Most people from Germany are concerned that their money is being used to support other countries such as Greece which are known for unhealthy economic policies. For instance, most of the money in Greece goes to pay for pensions, a privilege which even Germans’ never have. If this happens, it will signal the ‘death’ of the currency.
For quite some time now, the economic growth of the European economies has been significantly low. Countries such as Italy are today not doing well. Indicators such as the GDP, inflation, purchasing index are all going against the expected results. For this reason, a weak economy will lead to a weak currency. This is amidst the massive competition the countries are getting from the Chinese market.