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How to Trade the Euro in December

12/14/2012 9:41 am EST


Daniel Gramza

President, Gramza Capital Management, Inc.

Dan Gramza explains how he is going to be trading the euro from current price levels and news events.

I’m here with Dan Gramza talking about a subject near and dear to my heart; the euro-dollar.  Now, the euro is in the midst of this huge political and economic crisis and I’m dying to hear what you have to say about it.

Well it sure is, and its behavior is not surprising if we think about how its been moving for the last few weeks, the last few months, but I think there are some overview things that you know and you probably have thought about these too, Rob, and that is what is the situation here.  We have these countries that are trying to sort out their economic relationships, but they did some things that I found fascinating.  You know last year if you and I were sitting together here talking about this we would be hearing, well, Germany doesn’t support it, France does, and they go back and forth and Spain needs some money and they would say oh no we’re not sure.  They eliminated part of that discussion, because what they’ve done now is they’ve come out with their mechanisms, they’re calling it, to eliminate that discussion.  Here’s what they’ve said that I thought was interesting.  One, an unlimited amount of money.

Right.  They’re opening the spigots.  They’ve now shut down this discussion about running out of money.

Exactly right, so they’re saying okay we’re going to buy debt.  You want to sell some debt, we’ll buy it.  No numbers limiting that.  The other thing they said, which I found fascinating is they said we’ll sterilize this, which means, and as you know, that as they put money in they take money out, so that means it’s not going to be inflationary, which is different than what the US Fed did. Because they’re saying we’ll pump in $40,000,000,000 a month, no limit on amount, no limit on time, but they didn’t say anything about sterilizing it, which is why we saw gold and other markets react almost immediately to that kind of information.

So in Europe, they’ve done some things to quell that down, they’ve gotten approval for their mechanism, but the issue still remains the implementation of it and I think that’s what they’re struggling with right now.  You know can Greece meet the expectations they need?  They did the smart thing by giving them more time to meet those requirements because they want to keep it together.  It’s too much political capital.  There’s too much capital invested in that marketplace, so long-term, I’m bullish on the euro.  I’m bearish on the dollar.  I don’t think there’s a reason why somebody wants to hold the dollar at 0% interest. 

If our interest goes up then, but we’ve got a couple years like that right, Rob?

Oh yeah sure.

We’re probably going to see these interest rates from what they’ve said at these levels.

Well, then what about the yen and the aussie, they’re two completely separate stories now.

Well, yeah and you know the yen; okay let’s start with the yen.  That’s a good one.  What fascinates me about the yen is that we’ve seen over the last few years, a change in its role.  Because of their interest rates, we’re typically part of the carry trade, as you know. People are borrowing in, and they go down to Australia, and they could invest it, borrow at 0.5% and invest it at 3.5%, now it’s 3%.

Those were the best years of my life, Dan.

There you go, there you go, Rob.  Okay, alright, and now we’re seeing yen taking on a different role.  Not only is it a part of that carry trade, which still exists, but we’re seeing yen in its own environment.  We’re seeing yen taking on this reserve currency kind of behavior.  That when we see uncertainty and other currency…

Safe haven currency.

There you go, exactly right, Rob, a safe haven currency.  We’re seeing that kind of behavior, which is different.  So, it’s kind of disengaged from its previous behavior in the past, but I think it’s still there, but right now we’re seeing a new role for it and that safe haven, I think, is an example.  We’re seeing its economy reflected more in the price of that currency, and that one to me is a function of where the dollar goes.  If these other currencies get stronger, then I’m expecting that market to move down.

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