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March 19, 2020

Euro to Fall Below Parity With the US Dollar: The Case!

Alaric Securities
Man holding Head while Stock market is going down concept: Euro is goind down equalized to US Dollar

With EURUSD pair making new 52 week low today, one begins to wonder – is this the bottom (time to buy) or are we going lower (time to sell)?

EURUSD March 2020
EURUSD on Monthly Graph

It is our humble opinion that what we are seeing today in the market is the beginning of a dramatic depreciation of the EUR relative to USD.

There are three reasons for Alaric Trader‘s bearish view on EURUSD:

Coronavirus Spread

  • Europe is a lot more impacted by the new virus. It is our expectation that due to the delayed reaction of Spain, the number of cases in that country could potentially be bigger than Italy.
  • The unorthodox approach, already somewhat abandoned,  by the UK government to seek “herd immunity” to the disease is causing most experts to expect the number of cases in the country to be close to(or exceed) the number in China.
  • It is our expectation that, given the trajectory of the spread of the virus, we can see close to 500 000 cases in Europe in the next 30 days with UK, Spain and Italy accounting for half the cases.


Weak Fiscal Response ( Fiscal Irresponsibility)

Given the magnitude of the crisis, the ECB response has been grossly inadequate. The launch of the 750 Billion EUR PEPP is just a fraction of what the situation requires. Alaric Trader professionals believe that the magnitude of the facility should be in excess of 3 Trillion EUR and should include recapitalization of the systematically important banks within the EU.


Excessive Leverage in the EU Economy

European interest rates have been negative since the beginning of 2016 or close to 4 years now. During that time the availability of credit has dramatically increased while interest rates have dropped even for the riskiest securities and loans. While we did have the Brexit Crisis in the summer of 2016, overall this time period is best described as smooth sailing.

In a peculiar way, it reminds us of Vasco Balboa, who called the newly discovered ocean the Pacific Ocean just because he experienced balmy weather.

The Pacific Ocean is hardly characterized as balmy just like leverage is not danger-free even if the cost of leverage is zero or close to zero. We believe that many market participants have grossly underestimated how volatile the deleveraging process can become. What our traders are observing in the high yield space in Europe this week is a cascade of margin calls with illiquidity and wild price fluctuations not seen since the 2008 crisis with bonds sometimes trading at 10% discount to their fair market value implied by the CDS market.


Given the unprecedented mixture of problems that existed in the European economies even before the pandemic, the easiest way out of trouble, and almost inseparable part of any recovery, is a devaluation of the EUR relative to USD.

In our opinion, it possible to see 15-20% (0.85-0.90 EURUSD) devaluation in the next several months.

This is not a recommendation. The information provided is an objective and independent explanation of the matter. Alaric Securities OOD and other entities of the group do not trade in the above financial instruments.