Maria’s Note: Longtime readers know Bill is a self-proclaimed “fuddy duddy” when it comes to investing… and he certainly doesn’t claim to be a trader. But currency trading legend Andy Krieger spotted a pattern too good to ignore.
Andy made the front page of The Wall Street Journal after booking a $300 million profit from a single trade. And in a special event at 8 p.m. ET, he’ll break his silence about that trade for the first time on camera. Seven lucky folks will even get Andy’s research and trade recommendations, completely free. If you’re interested, find out more here.
Then read on for Andy’s timely analysis on how to play a weakening euro…
Take a look at this monthly chart of the euro against the U.S. dollar (EUR/USD)…
The pair has quietly worked its way lower over the past month, grinding its way to levels not seen since 2017. Though after being so quiet, for so long… at first, I was skeptical about whether the recent weakness could turn into a major trend.
Now, though, I believe that the answer is a resounding yes.
Since 2015, the pair has traded in a range of just over 21% (between 1.0340 and 1.2559). That is extremely tight for a pair that can move move 15% – or more – in one year.
In fact, during the past year, the pair has traded in a range of just 6% (between 1.0830 and 1.1480).
However, the macroeconomic developments in the U.S. and Europe have diverged in recent years, so it makes little sense for their currencies to trade in such a tight range.
Upon further inspection, you will note that the euro has been slowly creeping lower since mid-2018. What you’ll also see is that the euro could head MUCH lower if it breaks through certain key support levels against the U.S. dollar – namely the low just below 1.0340 from the beginning of 2017.
Still you might wonder, “Why sell euros now?” The eurozone’s negative fundamentals have been in place for some time, but the market has essentially chosen to ignore them, with the result being an unnaturally stable currency.
One key factor driving my view is that Europe is extremely vulnerable to a slowdown in China. China is one of the largest importers of European goods and services, so the economic meltdown in China will hit the two biggest economies of the eurozone – Germany and France – very hard.
With China’s growth rate set to plunge in the first quarter of 2020 (and maybe beyond), Europe is going to get slammed. European exports, a crucial component of European economic stability and growth, will surely be disappointing, and well below the expected levels for the year.
In fact, my bet is that before the first six months of 2020 are done, we will see some sort of concerted economic support by governments and central banks to deal with the coronavirus outbreak once the economic impact becomes clear.
And that clarity may cause traders to look more deeply at European fundamentals. My guess is that once people analyze the data carefully, the prospects for a weaker euro will become overwhelmingly apparent.
Another factor is that the eurozone has seen tepid growth over the past decade, despite trillions of euros’ worth of easy money being pumped into the system. It is in this way that the ECB’s experiment is failing. The limits of monetary policy are being tested. What happens when Europe goes into its next economic downturn?
Monetary policy is another negative factor for the euro. Negative interest rates discourage foreign investment in short-term euro-denominated money market instruments. In fact, the lower the euro goes, the more the global investors with eurozone exposure will feel the pressure to hedge their euro exposure and rotate into the dollar.
In fact, I have received numerous calls from people in Europe who are fed up with the current situation – in which they must pay their bank about 1% in order to deposit euros into their account.
They are progressively more willing to convert their euro savings into dollars to earn some interest, taking on some currency risk in the process. They feel that the euro’s upside potential in this environment is negligible, so holding dollars becomes sensible by default.
The problems in Europe are so extreme, I doubt the euro will respond to any significant uptick in risk sentiment over the coming weeks and months. I advise all traders to prepare for a continued decline in the euro by selling short the EUR/USD currency pair.
It will probably grind slowly lower for a while longer… But if things play out just right, the euro’s slide may start to accelerate and develop into a powerful down move. My ultimate target is potentially much lower – even past the 2017 low under 1.0340.
You’ll earn good money shorting the euro… due to the interest rate difference between the euro and the dollar…. and likely pick up a sizable capital gain over time. But don’t forget to keep a trailing stop. I think a trailing stop of 1% is sufficient to prevent any losses in the event of a strong reversal.
– Andy Krieger
In short, I’ve spotted a unique pattern of compression across multiple asset classes. It’s signaling a massive turning point in the markets, due just months from now.
This big trade will be the basis for an apprenticeship program I’m starting… If you want to be a part of it, with the chance to do so for free, sign up for tonight’s event right here.