Currency Trading - Euro Drop Against The Dollar?
Currency Trading - Euro Drop Against The Dollar?: I want to share with you a little known secret that most traders may know, but definitely are NOT sharing.
First of all, I should start by telling you that I believe we’ll see the euro drop against the dollar around the fourth quarter of this year. In other words, yes, I believe the dollar could strengthen in the short-term (JUST in the short-term) vs. the euro.
This may sound counter-intuitive considering the latest GDP data from Europe is positive. Also, Germany and France, the Eurozone’s two powerhouse economies, just posted positive GDP numbers.
But let me be clear: I do NOT dispute that Europe could be growing. But there is something much bigger happening in Europe that could pull the rug out from under the euro around the further quarter.
I’m talking about the crisis that is looming in the European banking sector.
Remember Back in the Good Ole Days of 2007?
Back in the glory ra-ra days of 2007 and 2008 (pre September 2008) banks in both the U.S. and Europe were going crazy.
They had expanded their operations and taken on excessive capital. Those misguided bankers then turned around and invested this capital in risky assets like Mortgage Backed Securities (MBS) and CDO’s, etc.
Of course, we all know what happened to these risky assets. Most are worth pennies to the dollar these days.
The American banks, which created and invested in such structures have all had to write down such assets. The American accounting boards have also changed the accounting laws to accommodate no further mark-to-market rules.
All these measures have helped U.S. banks avoid taking on further losses.
It’s Another Matter On the Other Side of the Pond…
Europe hasn’t taken any significant measures to air the dirty laundry from their banking books. In other words, Europe still has a long way to go to clean up their banking sector and their balance sheets.
Unfortunately, European Bank balance sheets are denominated in euros.
When European bankers came to America and borrowed funds in U.S. Dollars, they invested their U.S. funds in U.S. assets to balance their U.S. denominated portion of their balance sheets. Banks are required to balance their assets and liabilities by currency within their overall positions.
Come year-end for banks, the European Banks will have to balance their U.S. denominated balance sheets. At that point they will have to face the fact that their U.S. assets simply do NOT equal their U.S. liabilities (borrowings).
To fix this problem, banks will have to inject U.S. equity to meet internal requirements. So they will have to sell euros and buy U.S. dollars. And according to some major banking analysts, their requirement can be as much as $400 billion.
This is the fundamental reason I expect a fall in the euro versus the dollar as we get closer to year-end. European Banks that know about this problem will start shoring up their U.S. balance sheets before the year-end is upon them. And we will see the euro tumble then.
Keep in mind: This story hasn’t started to unfold yet. As I said in the beginning, for now, Europe is still showing all the signs of strength. I doubt we’ll see any confirmation on this banking crisis story until later in the fall.
As a trader and investor, I would ONLY start shorting the euro when I see signs of this banking crisis start to appear in the market.
In the meantime, stay strong foreign currencies.
By Ashish Advani - www.worldcurrencywatch.com
Tags: 
