Euro Rebounds despite Continuing Debt Fears

It has been a bumpy ride for the euro in the past few days as the European currency would suffer big losses one day and recover them the next day. Thursday seems to be the day for recovering losses as the euro strengthened 0.52% against the U.S. dollar to trade around $1.4251. At the same time, the euro moved past the ¥109 mark. Presently, the euro trades around ¥109.07, or 0.06% above its previous close. In this time of turbulence, the Japanese currency has been acting as a shelter against storms that have dominated financial markets in recent weeks. The Bank of Japan has tried to intervene in order to weaken the yen. Japan is an export-oriented economy and strong yen could bring disaster to Japanese exporters, who are already struggling to shake off energy shortages and supply disruptions caused by the twin natural disasters. However, for all its efforts, the Bank of Japan has only temporary managed to halt the rise of yen. The intervention of Japan's central bank simply cannot change the fact that Europe and the United States might be heading for a debt fiasco. Until the underlying causes for the rise of the yen, i.e. the debt crisis in the United States and Europe, are changed, the Bank of Japan might not be able to prevent the Japanese currency from rising even higher. Japan is not the only country which is trying to bring the value of its currency to “normal” levels. The Swissy, arguably the most popular safe-haven among currencies, has been reaching all time highs against the embattled European currency, even threatening to break parity with the euro. The Swiss central bank has recently surprised analysts by reducing its interest rates to near-zero. However, much like the Bank of Japan's intervention, the effects were very short-lasting. At the moment, Swiss National Bank is contemplating a new move: pegging the franc to the ailing European currency. The threat seemed to have worked as the euro surged against the franc. At around 8:44 am GMT, the euro traded around 1.0530 against the franc, or 2.21% above its previous close. Like Japan, Switzerland is also an export-oriented economy and skyrocketing franc could mean trouble for the Alpine nation's economy. Pegging the value of the franc to the euro might be the only way to stop the franc from reaching parity with the euro as fears of a collapse of the Eurozone persist. On Wednesday, France has come under heavy fire as the next possible victim of a credit rating downgrade. At the moment, France's credit rating stands at Triple-A. However, France is one of rare developed nations with primary budget deficit, which means the French government is spending above its means even when excluding repayments on previous debt. President Sarkozy has temporary interrupted his vacation in order to try to reassure markets that France's finances are stable. French banks have been under fire as well following a haircut many private lenders were forced to accept in Greece. In fact, French banks had the biggest exposure to the Greek debt and many of them are paying the price for it. Societe Generale (SCGLY), France's second biggest bank, has recently said it will be very difficult to achieve its 2012 profit target after a $1 billion writedown on the Greek debt. With France slowly moving from the Eurozone center into the debt-ridden Eurozone periphery, Germany remains increasingly isolated in its struggle to keep the Eurozone alive. To make matters worse, the German electorate and the ruling party are putting pressure on Chancellor Merkel to stop bailing out other Eurozone members. Germany is the largest European economy and at the moment one of its strongest economies. The German giant has come out very strong from the financial meltdown. If the Eurozone is to survive, it will have to depend on the willingness of Chancellor Merkel to use the German muscle. However, it seems that Germany is getting tired of bailing out other countries. Without the German support, the Eurozone might be forced to raise the white flag. ACTION ITEMS:

Bullish:
Traders who believe that Germany stands to lose too much with the collapse of the Eurozone, and will use all its muscle to prevent that from happening, might want to consider the following trades:

• WisdomTree Dreyfus Euro Fund EU is a long play on the euro. EU may rise if the euro appreciates.

• ProShares Ultra Euro ETF ULE is another long play on the euro. However, ULE should rise more than EU if the euro appreciates.

Bearish:
Traders who believe that France will be text target for the credit rating downgrade, and with France on defensive, Germany will give up the fight to save the Eurozone, may consider an alternate positions:

• ETFS Short Euro Long US Dollar ETC (Sterling) ETF (SEUP) is a short play on the euro. SEUP may rise if the euro depreciates.

• ProShares UltraShort Euro ETF EUO is another short play on the euro. However, EUO should rise more than SEUP if the euro depreciates.

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