The best ways to profit from the euro crash

With ECB money-printing and low interest rates, the euro is crashing spectacularly. John Stepek looks at what it means for your investments, and how you can profit.

Euro symbol smashed screen
(Image credit: SEAN GLADWELL)


The ECB's money-printing and low interest rates make for a very undesirable currency

The currency wars are really heating up.

The euro has absolutely cratered since European Central Bank boss Mario Draghi gave the green light to quantitative easing (QE).

Now all the talk is of the euro going to parity' with the dollar. In other words, one euro will buy you just one US dollar. It's not so long ago that a euro would get you $1.40.

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As a side effect, it's also tanked against the pound. Which is cracking news if you're off for a holiday in the eurozone this year.

But what does it mean for your investments?

Will one dollar buy one whole euro soon?

On the one hand, the European Central Bank (ECB) has just started printing money to buy bonds. That's driven interest rates down to record low levels. Money printing plus low interest rates makes for a very undesirable currency.

On the other, the US central bank, the Federal Reserve, is on the verge of raising interest rates (probably). US government bonds also have higher yields than most eurozone government bonds too, which makes the carry trade' (borrowing in a low-yield, weak currency to buy higher-yielding assets in a strong one) attractive.

However, the speed and extent of the euro crashhas been quite spectacular. And now you've got investment banks all over the place predicting parity'. It's the sort of thing that would normally make you think that sentiment had swung a bit far in the too bearish' direction.

And as James Mackintosh rightly points out in the FT, the euro really shouldn't be a one-way bet. The euro has a "record high" trade balance in other words, it exports a lot more than it imports, in terms of value which should be "a small prop" for the currency. (That's because all the people buying goods from the eurozone need to sell their currency and buy euros.)

Also, while everyone tends to focus on the misery in the likes of Greece, the economic picture across Europe is simply not as grim as you might think. Consumer confidence and retail sales growth are at very healthy levels.

So the euro has got more than a few things going for it.

The euro isn't a one-way bet but it might take a while to turn around

And yet it's only really since Mario Draghi started to win the QE fight that the euro began to weaken against the US dollar. So the recent past suggests that the actions of central bankers trump economic reality when it comes to the currency markets.

To be clear, I have no interest in predicting where the euro will go in the short run. As far as I'm concerned, currency trading can be fun, but it's like poker. A very small number of people can make a profit from doing it, but for most of us, it's an entertaining pastime. (And for some people, it's a life-ruining addiction.)

So I'm not saying you should be short or long the euro right now as a trader. But in the longer run, for as long as Draghi is cheering on QE and the US Federal Reserve is thinking about raising interest rates, then I reckon it's going to be hard for the euro to pick itself up off the floor.

Of course, that might change. The Fed may blink and fail to raise rates judging by its lengthy track record of doing just that, I wouldn't want to bet against it.

However, as James Ferguson of the MacroStrategy Partnership pointed out in a recent edition of MoneyWeek magazine, the ECB is likely to have to do a lot more QE than anyone currently expects. So that may well offset any lack of backbone by the US central bank.

The QE trade so far has been to buy the stock markets of those countries whose currencies are being hit hardest. That's why I'm sticking with Europe, rather than the US. If you're not already a MoneyWeek subscriber, you can get a catch-up report to bring you up to speed on our views on Europe (and some of the many ways to play it, including currency-hedged options) and other markets, and also get your first four issues free here.

Of course, Europe's instability could also pose a big threat to markets. We've seen that the Greek situation just isn't going away. My colleague Tim Price has a very gloomy take on the whole story, but it's worth being aware of how bad things could get you can read his views here.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.