The Euro and the Debt Crisis - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 24 November 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
Over the last two years, the Eurozone debt crisis has been one of the biggest drivers of global markets. Many European countries have suffered due to the crisis, as austerity measures have caused recessions, and confidence in the European economy has waned. There have been numerous occasions where the threat of default has caused panic in the markets.

It may be natural to assume that the euro has suffered significantly due to the debt crisis. It seems like a sensible trade to short the euro as the crisis takes its toll. But surprisingly, the euro has been extremely resilient. Despite having numerous short-term falls whenever a crisis has been near, the long-term performance of the euro has been steady.

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If we look at the performance of the euro against the rupee, we see the exact opposite of what we'd expect from the debt crisis. Over the last two years, EURINR has risen from approximately 61 to 71, a gain of around 18%. Instead of the euro collapsing, the rupee has been the worse performer.

If we look at performance of the euro against the dollar, the euro is down 3% against the dollar in the last two years. Practically this represents almost no change in two years. So despite the fact that we've heard a lot about the potential collapse of the euro over the last two years, the euro has been a steady and strong performer.

If past performance is anything to go by, there is no reason to expect that the euro will suffer a collapse. In the short term it is very likely the euro will fall if the crisis gets worse. But short-term falls don't necessarily lead to decline over the long term.

There is no clear-cut reason why the euro behaves in this way. It is possibly due to the fact that the largest Eurozone country (Germany) is doing just fine. In addition, if highly indebted countries were to default and leave the euro, the euro may actually be better off since it would then be composed of only stronger countries. Regardless of the reason, a long-term euro short position is unlikely to be a winning trade.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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