And the fire sale goes on! The EUR once again got sold like ice popsicles on a summer afternoon during the last several days as the debt contagion in the euro zone, particularly in Greece, worsens. Just last week, the fiber or EURUSD was trading around 1.2700. Similarly, the EURJPY was exchanging at around 118.00. Today, however, both euro pairs are down to 1.2200 and 111.50, respectively. Correct me if I’m wrong but that’s a loss of about 500 pips against the greenback and 650 pips versus the Japanese yen!
Like what I mentioned in my previous post, the once famous dollar-substitute, the euro, slid yet again against the safer USD and JPY when the biggest country in the euro zone, Germany, elected to forbid the practice of naked short selling and naked credit default swaps. What a minute! Naked? What the heck are we talking about here? Well, naked short selling is the shorting of investment instruments without borrowing them first. Here, the seller could “fail to deliver” what he sold since he is not yet in the position of the instruments. Credit default swaps, on the one hand, is a contract where the owner effectively pays periodically for a payoff in the event the loan issuer defaults. In any case, both naked or “bare” transactions allow traders to speculate on debt issues.
The banning of these trading transactions by Germany sparked some speculations that the credit crisis in the euro zone will worsen, causing the equities markets and the euro to slip. In my view, though, Germany has a valid point to halt such speculative trading at least in the mean time. Everyone nowadays seems to be very bearish on most of the investments instruments in the euro zone like the Greek and Portuguese bonds, and of course, the euro. It’s as if the market is already expecting the demise of the nations involved. Pausing naked deals, I think, should lift some of the selling pressure on those instruments. The action, however, still backfired.
Nothing seems to be working good for the European market nowadays. Not even a massive aid plan by the EU-member nations and the IMF, the ECB’s intervention in the bond market, and now, Germany’s ban of naked short selling has been able to restore confidence among investors. All of the parties concerned need to formulate something creative as soon as possible before the whole European situation deteriorates further and spreads across the seas. The only positive thing about this whole deal is that now there is “blood in the streets. ” Some investors often say that such moments are the best times to buy.