New Position – We’re Shorting the Euro (Again)

New Position – We’re Shorting the Euro (Again)

Starting early this year, we had a short Euro position via the ETF EUO – and covered that when Euro sentiment reached pessimistic extremes.  Since the Euro bottomed around 1.19 in early June, it rallied as high as 1.33 earlier this month.  Was that enough to send the “Euro haters” packing?

Judging by the charts – it may have been.  Since topping a few weeks back, the Euro has been slammed early and often.  It now trades below its 200-day moving average:

Euro Currency Price Chart August 2010 The Euro resumes its downtrend (Source:

I still believe THE trade to make is to short the S&P, and go long the dollar.  Because all markets are now nicely correlated, I think we should embrace the element of simplicity for our portfolios.  Why own 20+ “diversified” stocks at a time when most equities are rising and falling in tandem?

(And for a quick review on why the dollar is the only market worth watching, check out our recent piece about the dollar’s near-perfect reverse correlation with most other asset classes).

But rather than simply “going long” the dollar, I am thinking that a short play on the Euro could potentially be more profitable.  The Euro looks to be in the worst shape of all the other currencies that make up the Dollar Index.  So why not bet against the lamest of the bunch?

And – I have to come clean here – I went to buy a September Dollar Index contract yesterday via the futures markets – and it was not trading at the time (early afternoon PT).  But the Euro was.  So…I went short the Euro 🙂

Short Sept Euro S&P Futures 2010

We are now short the Euro AND the S&P 500.

“But wait!” you may be yelling at your computer screen.  “Isn’t the US Dollar in WORSE shape than the Euro???”

Great question – and yes, that may very well be the case.  It may also be THE reason why the dollar has been rallying like crazy.  Because – most of the debt outstanding in the world is denominated in US Dollars (as it’s the world’s reserve currency).  So when these waves of deflation hit the shore, and this bad credit goes POOF – and flies away to “money heaven” – that reduces the overall supply of dollars in circulation.  Less dollars around means the price of each remaining dollar goes up – oh the irony!

Bottom line: We think the two-month correction in the Euro is over – as evidenced by its recent downturn.  We think it’s going to take out its June lows with gusto – and head towards parity with the US dollar.

Meanwhile, the dollar should rally against most currencies.  And, stocks should resume their secular bear market direction – which is down.