The euro has been trading as if there is no such thing as a sovereign debt crisis, and that decoupling is overdone, this strategist says.
The risk premium on the euro has been shrinking as traders seem to have ignored the problems in Portugal, Ireland, Greece, and possibly elsewhere, says Jens Nordvig, global head of G10 FX strategy at Nomura Securities.
"We've been clearly pricing out the risk premium since January," Nordvig told me. "In early January, the idea that Portugal would go bankrupt and contagion would spread to Spain lasted for one week, and it has been gradually scaled back since then. It's essentially gone now, after risk premiums were driving all the moves in 2010."
That wouldn't be a problem if there were smooth sailing ahead for the euro. But a lot could go wrong, Nordvig pointed out. For one thing, investors have priced in about 85 to 90 basis points of interest rate hikes in a series of moves this year, and if the European Central Bank on April 7 does not deliver what investors expect, the euro could suffer. Also, the risks of debt restructuring are very real.
"A restructuring isolated to Greece, Ireland and Portugal will cost the core eurozone around $235 billion, while a restructuring that also involves Spain would cost the eurozone bank around $480 billion," Nordvig estimated. Those aren't insurmountable numbers, but getting to them would be very difficult politically, he told me.
Nordvig suggests selling the euro against a couple of crosses. Nomura is already short the euro against the Norwegian krone, and Nordvig is looking at the euro against the British pound.
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