This article looks at the potential collapse of the Euro.
In 2016 we saw some stunning events that rocked the very foundations of established traditions.
First there was ‘Brexit’. Then we had Donald Trump elected as president.
2017 has the potential for yet more upsets and political upheaval with a raft of elections and referendums across the EU. In fact, most of the major EU nations have a political election coming up by the end of 2019.
As I write this at the end of 2016, the general feeling is that everything will be OK. But my view is slightly different. I believe it could provide a great trading opportunity.
I am pretty much expecting another ‘Exit’ from the EU. And if this happens, the collapse of the Euro could begin.
There is a strong feeling of discontent in France. Italy also has issues with its economy and financial system. The Netherlands want to hold a referendum.
There has been much talk about the domino effect of another major country leaving the EU and I agree with this idea completely.
Traditionally, the Euro holds the nickname ‘Teflon’ among traders because whenever there is negativity, it never seems to stick.
In the run up to the ECB’s initial QE, the EURUSD rallied up to almost 1.40 before finally hitting 1.10. You will have probably noticed several occasions when the Euro has been impressively strong against a backdrop of economic uncertainty.
The Euro is probably the world’s second major currency and this has a lot to do with its resilience. However, I do feel that if more nations leave then the collapse of the Euro could gather pace.
The collapse of the Euro
The key to the Euro’s future value lies in political activity, rather than the actions of a central bank.
Right now, all eyes are on Britain and the very convoluted exit process that it is currently undertaking. If this is the focus then the markets will believe that Britain is worse off in this situation.
Britain is the fifth largest economy on the planet but it is leaving the world’s largest single market. The perception is that leaving the EU is a bigger risk than staying in.
But all that will change if there is an election in Europe that promises another ‘in/out’ referendum.
The fact that a political party could win a major election off the back of a promised referendum is telling.
If it happens then I believe that this would signal the potential collapse of the Euro and some fantastic shorting opportunities.
It is hard to predict exactly how any kind of break up would look. However, once the domino effect begins I think it will be very hard to stop.
I also believe that if the process of other nations leaving takes hold it would signal a terminal situation for the EU and its common currency.
This means that with enough momentum, the Euro could completely cease to exist within the next five years.
As a trader, my only concern is to try and map out how I think this process will play out while factoring in the Euro’s tendency to resist weakness doggedly.
Potential trading opportunities
Seeing the potential for this to happen is the first step to being able to trade it successfully. Right now, the market is almost asleep to this possibility. Most analysts dismiss it as unrealistic.
These are the same experts that showed Hillary Clinton with a 90% probability of winning the US elections as polling closed.
The same conviction in established institutions also saw the GBPUSD power its way to 1.50 just before the EU referendum results started to come in.
As a trader, you need to use those lessons as templates for similar events playing out in the future. The next time they occur, you will be ready to take advantage of them.
I will also be looking out for the use of ‘referendum promises’ as vote generating tools.
It is the obvious choice for a politician that is trying to win the vote. If these different political parties start promising referendums then this is the first clue.
This will provide a great indication of what the prevailing political sentiment is inside each country.
The next thing I am looking for is if those parties that promise a referendum actually win the vote. This is an obvious one, but another rung in the ladder, none the less.
Finally, I will be closely observing any dates that are set for these referendums to take place. And the results they yield.
Trading the Euro in the mean time
The collapse of the Euro is part of a long-term outlook. In the short-term, the main trading opportunities will come via the ECB and its monetary policy.
There is no reason to expect any kind of collapse until real panic and uncertainty sets in. For this to happen, we need concrete events to unfold across the continent.
There has been talk of the ECB tapering its QE programme. This will correspond to the levels of inflation across Europe.
If inflation does start to rise beyond 1.4% in its core reading then tapering would be a reasonable possibility.
But given all the uncertainty, I’ll be surprised if the ECB changes its policies too much between 2016 and 2018.
The collapse of the Euro might seem a distant possibility and may never come to fruition. It is however, one of the things on my watch list as we move into 2017!
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