Without wanting to be alarmist or anything there was a great article published in the Financial Times on the 31st of August 2011 by Hans-Olaf Henkel. Henkel makes an interesting case for the strong European countries (namely Austria, Finland, Germany and the Netherlands) to exit the Euro and to form their own currency. This is in stark contrast to the often debated discussion of whether Greece (you can substitute in here for Portugal, Ireland, Italy or Spain) should be tossed out of the Euro to allow their economies to re-jig themselves with a devalued currency of their own.

I bring this to your attention because “Black Swan” events seem to be all the more frequent over the last decade. Just imagine waking up tomorrow when you’re long Euros to read that Germany left the currency union overnight and re-instated the Deutschmark! Stranger things have happened.

Of course, you could rightly consider this to all be too alarmist and unlikely. But I think it is prudent when you are strategising for your FX moves to consider game changing events- as you needed to do recently when the USA was downgraded to AA credit status. No matter what happens to the US economy you can feel pretty safe that there will be a USD currency the next morning. But can you be as sure about the Euro??? Just as you always have to act cautiously when holding a currency that has a fixed exchange rate (because you never know when you’re going to get out of bed to find the government just intervened and smashed your trades), likewise the Euro is a real liability in terms of regulatory interference and unexpected game changing events.

So cast a wide net in your strategy. Sometimes there are better opportunities with less risk in more out of the way trades away from the hotspot of EUR/USD. Check out the CAD, AUD, Mexican Peso, South African Rand, Brazil Real (see last weeks post for more on the Real: http://www.fxstrategy.com/articles/fundamental-articles/brazil-get-real-73.html ), Indian Rupee and the Hong Kong Dollar.

Happy FX Strategising!

By Friday Fundamentalist, Published on 3rd of September 2011
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