Market Overview

Forget Parity, EUR/USD to Fall to 0.82?

There have been many bold predictions for 2012 and beyond, with the extreme case being for the euro to trade at parity with the U.S. dollar.

We all know Europe has problems just as horrific as the United States; however, most analysts would argue Europe's are probably worse.

One of these Euro-bears include Michael Platt, founder of the $30 billion hedge fund BlueCrest Capital, He spoke to Bloomberg Television's Erik Schatzker and Stephanie Ruhle in his first-ever live TV interview a few weeks ago.

Platt said that most of the banks in Europe are insolvent and the situation in the region is "completely unstable." On investing in illiquid assets, Platt said he "would not touch them with a barge pole" and that "the major opportunities will come post-blowout."

Alarmingly, he had this to say about the sovereign debt crisis:

"The level of concern of what we have about what is going on in Europe is absolutely huge. When you evidence all over the markets that they are pricing for the potential of the eurozone break up, it is contrary to what everything is set by policy makers and by central bankers. We distill it down essential fact that we continue to focus on at BlueCrest Capital Management - if you look at the debt of Italy at 120% of GDP, which is increasing at a real rate of 5%, and if you look at the GDP, which now is forecast next year to be declining, arithmetically their debt is going to blow up. And we don't see anything happening at the policy level that gives us any indication that there's anything that's going to convert this situation from where it is now to a much more substantial and real crisis in the future."

There are many different scenarios that could cause the euro to continue its recent decent. Some scenarios include intervention by the European Central Bank, continued U.S. dollar strength, or a partial break-up in the Euro Zone.

Benzinga reached out to Brian LaRose, technical analyst at United-ICAP, to get his perspective on the euro.

"We have been telling clients since the first half of 2008 that the euro could hit parity with the U.S. dollar," LaRose said. "We see the euro hitting parity by 2016 at the latest; however, that time horizon could be much, much sooner depending on developments in Europe."

LaRose continues on to described some of the catalysts that could affect the outlook of the euro:

"While the problems in the United States still exist, Europe's problems are much worse," LaRose continued. "The risk of sovereign default, a break up or restructuring of the Euro zone, and possible ECB action, are all weighing heavily on Europe and European institutions. So the US remains a safe haven."

LaRose concludes with his potential scenario if Europe implodes:

"In our bullish case for the U.S. dollar, we see the DX Index trading to 91.622, with our longer-term target being 103," LaRose concluded. "This would translate to a minimum target of 1.07 in the Euro FX and possibly a target as low as 0.82 versus the dollar, in an extreme scenario."


ACTION ITEMS:

Bullish:
Traders who believe that Europe's problems are easily fixed, you might want to consider the following trades:
  • Any actions that reinstate investors' confidence in Euro might make the currency appreciate in value. Going long EUR/USD could be a profitable trade.
  • Resolving the Euro Zone crisis would be bullish for the European stocks. Vanguard MSCI Europe ETF (NYSE: VGK) is diversified play for this outcome.
  • European financials that have been hit hard might recover. Deutsche Bank (NYSE DG) and ING Groep (NYSE: ING) area two companies to look into.
Bearish:
Traders who believe that the Euro Zone crisis will worsen in 2012 may consider alternative positions:
  • Invest in companies that have no exposure to Europe. Wisconsin Energy Corporation (NYSE: WEC) and DTE Energy Company (NYSE: DTE) are two dividend paying options.
  • Go long PowerShares DB US Dollar Index ET (NYSE: UUP)
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Follow me on Twitter @bpilzner

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