How to Trade the Euro After the Summits
Every snippet of Europe news is moving the markets ahead of the summits. Here's a euro trade for when the knee-jerk reactions subside.
It's a little hairy trying to trade the euro right now, with investors on the edge of their seats ahead of the upcoming European Union summits. Luckily, the strategists at Barclays Capital have taken the long view on the single currency.
"The measures announced on Sunday and Wednesday will likely expose, yet again, the complexities of finding a long lasting solution to the crisis," the strategists wrote in a note to clients. "These solutions will likely take months, perhaps years, and in the meantime a weakening economic outlook in the euro zone is likely to complicate the healing process. We expect that the ECB will eventually be forced to ease monetary policy and the EUR will weaken further, even if the tail risk of a systemic crisis is capped."
Translation: whatever the near term reaction of the euro to post-summit announcements, the pitched battles along the way don't bode well for lasting harmony, and the euro zone economy isn't looking so hot either.
As for how to trade on the summit, Barclays suggests steering clear of the headline-driven euro itself, and focusing on currencies that reflect overall risk sentiment. If the European Central Bank is to play a big part in the plan, Barclays expects risk-on currencies in emerging markets to fare better than the dollar and the Japanese yen. But if the bank's role is limited, as Germany prefers - and Germany, after all, has a big voice here - Barclays' suggests that "investors should remain extremely cautious about being long risk in the coming days."
Good luck out there.
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