The Yajnik Letter

Is betting against the Euro getting a bit crowded? Possibly…but my reason for betting against the Euro is not because I feel it will completely collapse and go to zero. Rather, I am trading based on UNCERTAINTY of the Euro.

Right now Greece is in a world of mess and other countries, such as Spain and Italy, aren’t far behind. What we have is a currency connecting countries with different governments, cultures, languages, and ways of conducting business. Also, none of them really like each other (actually I can’t statistically prove that but my bet is that the Germans don’t really give a hoot as to Ireland’s problems other than the impact on the Euro). Do you see the issue? Plus, there is a mandate when the Euro was formed that no country can have debt levels exceeding 10% (I might be one or two percentage points off) of GDP. Greece is at 12% so, technically, it should be kicked out. A bailout by the European Union would not be approved. Regardless what happens, there is uncertainty and it should continue to increase as other EU member nations continue to struggle.

Please see the below article from today’s Wall Street Journal
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Hedge Funds Euro Bets
Several Hedge Funds Betting Big Against the Euro

Several large hedge funds are placing major bearish bets against the euro. The funds have been meeting at exclusive meetings where the future of the euro has been discussed. Hans Hufschmid, a hedge fund administrator, says “This is an opportunity…to make a lot of money.”

…a small group of all-star hedge-fund managers argued that the euro is likely to fall to “parity”—or equal on an exchange basis—with the dollar, people close to the situation say.

George Soros, head of the $27-billion asset fund manager, warned publicly last weekend that if the European Union doesn’t fix its finances, “the euro may fall apart.”

The currency wagers signal that big financial players spot a rare trading opening driven by broader market gyrations. The euro, which traded at $1.51 in December, now trades around $1.35. With traders using leverage—often borrowing 20 times the size of their bet, accentuating gains and losses—a euro move to $1 could represent a career trade. If investors put up $5 million to make a $100 million trade, a 5% price move in the right direction doubles their initial investment.

It is impossible to calculate the precise effect of the elite traders’ bearish bets, but they have added to the selling pressure on the currency—and thus to the pressure on the European Union to stem the Greek debt crisis.

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Enjoy your weekend!

-Samir