Structural and political uncertainties make forecasting and hedging a major challenge.
George Soros and derivatives experts haven’t agreed on much in recent years. But the scourge of the pound sterling is united with many traders of currency futures and options who expect the Greek crisis won’t be solved soon—and that means more headwinds for the euro. Greece is attempting to right itself with a multi-billion-euro bond offering and a still-unclear bailout by other eurozone member countries. But treasurers nonetheless should consider the possibility that the single currency will plummet more.
Mr. Soros, who has called some derivatives “instruments of destruction” and whose $10 billion short position against the pound pushed it out of the ERM in 1992, penned an editorial in the Financial Times today reiterating his view that the eurozone is fundamentally flawed. The single-currency union, he argues, cannot survive much longer without the political union required to set taxes on a eurozone-wide basis. Otherwise weaker economies such as Greece and Spain will spend excessively and rack up debts, leading to more crisises like the current one.
Meanwhile, the rate for short-dated euro forwards versus the dollar has collapsed by 50 percent this month, according to Bloomberg. That means the derivatives markets believe the eurozone’s monetary overseers will remain unable to raise interest rates due to the additional pressure that would put on the Greek economy, as well as Spain’s, which is also showing significant signs of trouble.
While currency forecasting and hedging can be a challenge when markets are calm, the fact that large structural and political considerations—and uncertainties—are weighing on the euro and its cross-rates makes this a particularly challenging time for treasury.