It’s High Time to Short EUR/USD

10/24/2011 10:00 am EST

Focus: FOREX

John Netto

Author, The Global Macro Edge

The premier opportunity in the world currency markets today is shorting the euro against the US dollar, says John Netto, who also highlights longer-term set-ups including the Japanese yen and Australian dollar.

The euro has been in the news in recent months. We’re talking today with John Netto; how do you suggest investors play the euro/dollar trade?

Short as much as you can while you can. The euro I think has a real shot in the next 18 months of going back to parity. 

A lot of the sovereign debt concerns we’ve seen come into play, and ultimately, the question becomes if you’re going to play the euro—and I say short as much as you can while you can; it’s not that dire, obviously, I’m a little tongue and cheek there—but what’s the best risk-adjusted way to play the sovereign debt issue out there? 

If you want to look at the charts, gold priced in euro was the darling hedge fund trade of 2008, and 2009; 2010 it came back in vogue again, but in 2010, gold priced in euro went from EUR750 an ounce all the way up to close to EUR1100 an ounce—it topped out at $1080. 

This year, gold priced in euro went from EUR1080 an ounce all the way up to almost EUR1360 an ounce, so when you think about two products, which are inversely correlated to the US dollar, if you don’t necessarily want the dollar/euro risk that comes from that currency cross, you still want to benefit on a relative basis. 

You want to find two products that have similar correlation where one can outperform the other, and gold and euro are both inversely correlated to the dollar. Gold has significantly out performed the euro, and I think that will continue.

How about the yen, what’s your view on that?

I think the yen, USD/JPY, it’s been a long time near 76, 77; some intervention concerns in terms of what the Bank of Japan (BOJ) is doing, but you can’t stop the market. No matter how much a central bank wants to intervene, they can impact things in the short term, but longer-term market trends ultimately prevail. 

My opinion about USD/JPY is that it will head to 70, and so it will still offer a significant move to the downside if you want to be short USD/JPY. 

Over the longer term, John, any other currency trades that you think investors ought to take a look at?

Assuming the aussie dollar is alive again, we’ve mentioned recently some of the big drawdowns and some of the big pullbacks in commodities. I think the positive carry, positive interest rate that the aussie dollar pays and the pullback that it’s given is a nice chance now. 

Obviously with the aussie you have a play to China, and there’s a global growth concern. Because of the positive carry, there’s a lot of that deleveraging and unwinding going on, so just be aware of the volatility there and adjust your portfolio accordingly.

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