How To Play The Euro With ETFs As The Crisis In Greece Unfolds

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April 19, 2010 11:06am NYSE:EUO NYSE:FXE

Greece is back in the news as the European Union bailout apparently is in doubt and the Mediterranean playground struggles to refinance its debt


On Tuesday, April 20, 2010, Greece will attempt to refinance an 8 billion Euro bond that’s coming due followed by another 8.7 billion due on May 19th.  With yields at very high levels, the Greek government is already heading to the European Union and IMF for help but the wrinkle in the drama is that the “bailout” announced last weekend by the European Union may be subject to approval by various countries’ parliaments and legal challenges against the whole thing are underway in Germany and Switzerland.

The Euro continues to be under pressure as traders worry about the ability of the union to carry this off and the possibility that this “contagion” could spread to Portugal and Spain in coming days.

Greece’s recent short term auction of six month and twelve month Treasury bills sold at the exorbitant rates of 4+% and the long term spreads are 6-7% or higher which it’s unlikely to be able to pay.  Germany is trying to figure out whether it can offer the aid without a parliamentary vote while a group of professors is launching a law suit to stop the bailout because they believe it runs counter to the EU charter.

So depending upon your outlook for the outcome of the Greek Drama/Comedy/Tragedy you can go “long” or “short” the Euro to participate in this unfolding drama.

If you believe that the crisis will be solved and Greece, Portugal and Spain will emerge from this without further problems, that would be bullish for the Euro and you could consider (NYSE: FXE) Rydex Currency Shares Euro Trust.

In the chart above, you can see how the Greek drama has taken its toll on the Euro this year and how just in the last week or so, (NYSE: FXE) has rallied in response to the European Union bailout.

If the bailouts are successful, one could make a good case for a strengthening of the Euro and the European stock markets.

However, if the bailouts fail or aren’t implemented in time to prevent a default by Greece or if more money is required than is currently believed, that would very likely be negative for the Euro.

In that case, a “short” position in the Euro by way of an inverse ETF could be considered.  ProShares offers an ultra short Euro ETF that tracks at 2X the average movement of the underlying index.

In the chart above you can see how (NYSE: EUO) has prospered as the Euro has suffered.  As always, when using leveraged ETFs, you must understand how they work and what the risks are by making a careful study of the prospectus and literature available on inverse Exchange Traded Funds.

So, however, the Greek Tragedy/Comedy/Drama plays out, there will be winners and losers, and although this is a global drama, individual investors can now participate through the flexibility and versatility of Exchange Traded Funds.

Written By John Nyaradi From Wall Street Sector Selector


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