Can The Euro Really Keep Rallying?

Now that even Alan Greenspan has gotten into the act of predicting the disintegration of the Eurozone, it seems bizarre that the Euro has been rallying for the past 3 weeks. At some point soon, shorting the Euro is likely to be a very profitable trade. The exuberant relief over European leaders having cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosting their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) is likely to lead to a nasty hangover if there turns out to be difficult finalizing the deal. As pointed out in a Reuters article on the agreement, “key aspects of the deal, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks to pin down, meaning the plan to rebuild confidence after two years of crisis could unravel over the details”.

The outcome of the negotiations to finalize the details of the deal may be a win/win for a short position in the Euro. Either: 1) there is trouble finalizing the details, and the Euro declines in value, or 2) they reach a deal that shows that German fiscal discipline has cratered due to their insane desire to hold the Eurozone together, and due to its stagflationary risk, the Euro declines in value. Either way, shorting the Euro may be a winning trade.

Much of the rally in the Euro has been due to short covering. Once this rally finally fizzles out and the short covering is eliminated, the value of the Euro could be in for quite a fall. I certainly would not jump into the teeth of the strength of the today's upward surge with a short position, but would not rule out shorting the Euro in the very near future.