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What the Pain in Spain Will Do to Euro

Friday, 20 Jul 2012 | 4:40 PM ET


Sabine Scheckel | The Image Bank | Getty Images

A bailout for Spain may be "only a matter of time," this strategist says, and that's bad news for the euro.

Sure, the news from Europe is grim - but if you're a euro trader, that may not be such a big deal.

"The euro is still trading like a risk currency," says Geoffrey Yu, FX strategist at UBS. "People aren't really trading the euro off euro zone specific news right now."

The flip side, though, is that "we still have plenty of event risk up ahead as far as the euro zone is concerned," Yu told CNBC. There's that German constitutional court getting ready to weigh in on the bailout fund, and "a lot of people think it's only a matter of time before Spain embarks on a full fledged program" of aid, he added.

The other problem with the euro trading like a risk currency is that it can't really compete on yield. After the European Central Bank cut interest rates in early July, "it was clear that the ECB had a lot more potential in terms of monetary stimulus," Yu says. "And right now the euro is being considered more as a funding currency."

Euro Still Trading Like a Risk Currency: Strategist
"The Euro is still trading like a risk currency, we still have plenty of event risk up ahead as far as the euro zone is concerned, the German constitutional court ruling for starters and a lot of people think it is only amount of time before Spain embarks on a full-fledged bailout program," Geoffrey Yu, FX strategist at UBS, told CNBC.

Look down under for a risk currency that's riding high, Yu says. "Looking at where the Aussie is trading, it might not make any sense but people have been saying that for a long time now."

There are plenty of naysayers on the Aussie, Yu adds, and they're not likely to be happy anytime too soon.

"Sure, it does look stretched, but it's just hard to fight a large China stimulus blast over the next several months," says Yu.

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