Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)
Keith shorted the EUR/USD cross via the etf FXE in the Hedgeye Virtual Portfolio in the last hour of trading today. We’ll take the other side of Goldman’s bullish EUR call today and fade the bounce on the replacement of Papendreou in Greece and the likely removal of Berlusconi in Italy (in the coming days) as we see weakness associated with the inability of Europe to contain its sovereign and banking imbalances, and volatility ahead as specific terms on the expansion (or leverage) of the EFSF, banking recapitalizations, and Greek haircuts remain unanswered.
Compounding these factors, Italy’s sovereign and banking risks have move squarely in the spotlight and the threat of a downgrade of France’s AAA credit rating continues to loom large, which presents risk for the country, region, and EFSF. Finally, and here we’re stating the obvious—outsized public debt and deficit levels by Eurozone member states aren’t going anywhere despite leadership changes. The damage done will take years to hone in (if we don't see member states leave beforehand) and in the balance, growth should be crimped over the longer term.
For a market that is looking for quick answers to Europe’s ail, we’d expect disappointment and therefore want to be short the common currency.
Tomorrow, Italy’s lower house of Parliament will vote on the 2012 austerity budget. Berlusconi has indicated that its approval is conditional to his resignation. We’d expect its approval and Mr. Bunga Bunga’s resignation to give a short term boost to the currency pair. However, the pair remains broken on intermediate TREND and TAIL durations and should $1.37 not sustainably hold, we don’t see downside support in the EUR/USD until $1.21 in our quantitative models (see chart below).
Passa un buon fine settimana!