Why the Euro Is Primed to Rise, and What to Do About It

Euro bills at teller window
Euro bills at teller window

There is nothing pretty about what's happening in Europe, but this strategist thinks the euro itself isn't looking so bad right now.

With all the bad news pouring out of Europe, the euro has been taking it on the chin, and traders who sold the euro against the dollar are feeling pretty good. But Jens Nordvig, chief G10 FX strategist for Nomura Securities, thinks the single currency could actually strengthen in the short term, and he is closing out the short euro position in his model portfolio.

Central banks may buy euros as they rebalance their portfolios for the end of the quarter, Nordvig said in a note to clients, and Greece is likely to receive some aid soon. Nordvig is also looking ahead to next week's FOMC meeting and says, "There is a general expectation that the Fed will once again deliver a clear dovish message, and the experience from QE1 and QE2 is that this is a potential dollar negative." Nordvig thinks the euro could tick up to about 1.40 near term.

This is only Nordvig's short term view, though. He told me that "We are reducing exposure, but our medium-term views remain unchanged." He expects the euro to fall to 1.30 in the fourth quarter, in fact, so he is using some of the cash to buy two-month puts on euro-dollar, while holding more that he can use to short the euro directly if it strengthens.

Options are certainly not for everybody. If you prefer, you can skip the options portion of Nordvig's approach and just watch for an uptick to sell the euro. Just be ready to move.

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