What Will Happen to Forex Trading if the Euro Falls? | Forex Factory

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What Will Happen to Forex Trading if the Euro Falls?

  • #1
  • First Post: May 6, 2011 11:39am May 6, 2011 11:39am
Does anyone have any insite on what would happen if Greece pulls out of the Euro? Is the Euro strong enough to be able to exist without Greece? Will the Euro be disbanned altogether and all countries involved just go back to their origional currency? If any of these things happened, what does it mean for us forex traders? And is there anyone reading this who traded forex BEFORE the Euro came into existance? If so, what was it like trading forex then? Was it better or worse? What are the pros and cons of having the Euro around?(From a traders perspective). I know these are alot of questions at once but I think all of us who trade forex have to be a bit concerned about this possible Euro implosion.
  • #2
  • May 6, 2011 11:46am May 6, 2011 11:46am
Quoting shocfacter
Does anyone have any insite on what would happen if Greece pulls out of the Euro?...

before the euro it was the DMK the Deutch Mark

and if the euro collapses

just short it

if it ceases to exist it will be replaced by another currency,


Greece doesnt matter, the Euro would be better off with out that tiny insignificant country that believes in a nanny state and is draining resources from countries that actually contribute.
if Greece exits the EZ i will long the Euro
so should portugal, spain and ireland and all the other broke leeching countries.

leave the core nations
AVT INVENIAM VIAM AVT FACIAM
  • #3
  • May 6, 2011 12:08pm May 6, 2011 12:08pm
Quoting the redlion
before the euro it was the DMK the Deutch Mark

and if the euro collapses

just short it

if it ceases to exist it will be replaced by another currency,


Greece doesnt matter, the Euro would be better off with out that tiny insignificant country that believes in a nanny state and is draining resources from countries that actually contribute.
if Greece exits the EZ i will long the Euro
so should portugal, spain and ireland and all the other broke leeching countries.

leave the core nations
Do you have even a remote idea what would happen if this occurred? Over a trillion would have to be written off as bad debt and noncollectable as Greece goes bankrupt immediately. Many banks would go bust immediately and all credit would freeze causing even more damage.

You go ahead and long the EU and lose your money. There is more at stake here than you imagine. Personally I think this is a ploy by the Greeks to force debt restructuring under friendly terms, they have nothing to lose either way.
  • #4
  • May 6, 2011 12:21pm May 6, 2011 12:21pm
Going long the euro immediately or even a short time after a country withdraws from the eurozone due to their inability to take responsibility for their actions (ie start paying taxes and lower public spending to pay back debt) would be a foolish bet. If Greece were to withdraw, the question then would immediately become 'whose next'? Insurance on Irish and Portuguese bonds would shoot up immediately as would their respective bond yields. Investors would also dump equities in companies that do business in these countries in the fear that they too will withdraw. In such a severe crisis correlations converge to 1 or -1 thus not only would Greek, Portuguese and Irish equities, sovereign/corporate bonds suffer but so would all assets classes all over the world due to voluntary as well as forced liquidation. During a crash cash is king as was proven during the subprime meltdown.

Even if this wasn't followed by a huge crash it would still take time for European banks to recover from their losses suffered by a Greek withdrawal. The immediate bet would be to buy US dollars, Swiss francs and Japanese yen against the euro.
If you don't risk, you don't ever have to lose.
  • #5
  • May 6, 2011 12:40pm May 6, 2011 12:40pm
Quoting shocfacter
Does anyone have any insite on what would happen if Greece pulls out of the Euro?
In part you can find my reply in my previous comment (see one post 4). Other than that you would have to take a look at previous financial crises. This is, after all, a sovereign debt crisis. Books, paper and data are all available online and in libraries. Dig it up if you really want to know.

Quote
Will the Euro be disbanned altogether and all countries involved just go back to their origional currency?
No way. It is too expensive both politically and economically. Don't forget what Europe looked like before we had the euro (constant devaluations to undercut each other in trade, large and unexpected profit/loss due to exchange rate fluctuations etc.). If you're not familiar with the history, perhaps you should do some reading. You won't get a very detailed reply over here at FF with lots of charts and explanations because most people here are traders and don't wish to spend their days reciting economic textbooks. I'm not being mean, I'm just telling it to you as it is.

Quote
Is the Euro strong enough to be able to exist without Greece?
Greece only makes the euro weaker. The EZ would be much better off without those spendthrifts, but a withdrawal would hurt the euro short term. Remember that the public sector debt crisis is not only about Greece, it's much larger than that. Pull up a table with the size of EZ countries' debt and GDP and you'll see that what I mean. Whenever rumors like this hit the wires it's not the immediate threat of Greece leaving, noone cares about that really, but what it means for the EZ as a whole.

Quote
And is there anyone reading this who traded forex BEFORE the Euro came into existance?
Probably not.

Quote
What are the pros and cons of having the Euro around?(From a traders perspective).
If you put 17 currencies into a pot you get much more liquidity which translates into lower spreads and lower volatility.

Quote
I know these are alot of questions at once but I think all of us who trade forex have to be a bit concerned about this possible Euro implosion.
The only thing you need to be concerned about is making money in a volatile market such as this. Being concerned when you can't do nothing about it leads to long term stress which has all kinds of nasty health effects. I live in a country that's part of the EZ and of course I'm keen to know what's happening but I don't want to spend my days worrying too much as there really is nothing I can do expect watch. And trade, of course.

--------------
EDIT
Here's the link to the Der Spiegel article that I was talking about, the same on that sparked the start of this thread. I would still like to emphasize that whatever decision will be made, right now it's just a rumor. Don't bet your house on it coming true.
If you don't risk, you don't ever have to lose.
  • #6
  • May 6, 2011 5:55pm May 6, 2011 5:55pm
Thanks to all who answered my questions. Especially Bug. Yes, bug, I thought about doing some kind of research on this matter but didnt know where to start. I assumed that because the Euro is relatively knew to the forex world in the scheme of things, that there would be no real precidence to look back on. Ive only been trading for about 5 years but I dont remember a country in the Euro Zone ever threatening to pull out during that time or any time before. I guess the only thing we could go back and compare this to WOULD be any one of the numerous, REGULAR (if you could call it that) economic crises any given country has had since forex trading has been in existence.
  • #7
  • May 6, 2011 5:58pm May 6, 2011 5:58pm
Why discuss something that is never going to happen? They'll make a deal because under no circumstances they will let someone out of euro.
  • #8
  • May 7, 2011 3:48am May 7, 2011 3:48am
Dumping Greece, and maybe a few others, now would hurt like hell, but it is cutting a bad trade short before it becomes catastrophic.
  • #9
  • May 7, 2011 4:14am May 7, 2011 4:14am
Quoting shocfacter
I guess the only thing we could go back and compare this to WOULD be any one of the numerous, REGULAR (if you could call it that) economic crises any given country has had since forex trading has been in existence.
What's going on in Europe is NOT an economic crisis so there's no point in looking at classic economic recessions. The economy is doing fine on its own. There is a a crisis in the financial sector that started in 2007 in the US with the subprime debt which is a major drag on the economy. There is also a sovereign debt crisis which is also a drag on the economy due to austerity measures (if you've been living beyond your means for a long time and then start cutting back you get a shrinking GDP and decreasing levels of well-being).

So, armed with this information, you need to dig up information on
a) past (systemic) banking crises - we've just been through one but the consequences are here to stay for a long time as households and companies pay down debt. There are enough examples of systemic banking crises to draw conclusions from. I've added a list from a BIS paper as an attachement.

b) past sovereign crises - even though we haven't had a default yet, it would do you good to know what is to be expected in case a default becomes reality. There is no doubt in my mind that Greece would have defaulted months ago if it weren't for the weak capital adequacy ratios of Central European and UK banks. Make no mistake about it, the measures put together to bail out Greece, Ireland and Portugal are there to save the European financial system. Once banks build a big enough buffer to tackle a full-on sovereign default you will start seeing defaults.

I'm not really an expert on this field, but it seems to me that the closest example to Greece could be Argentina. They were in an informal currency union having fixed their currency to the US dollar. They defaulted and devalued their currency. So maybe you could start your education by looking at Argentina first and then slowly expanding your scope. Wikipedia should be an easy first step, but don't limit yourself to Wikipedia only.
Attached Image (click to enlarge)
Click to Enlarge Name: systemic banking crises.png Size: 81 KB
If you don't risk, you don't ever have to lose.
  • #10
  • May 7, 2011 3:18pm May 7, 2011 3:18pm
A short read on the Spiegel story:
On the true agenda behind Der Spiegel’s story that Greece is thinking of exiting the euro

And a past article from the same blog about debt default and European banks:
It’s the (German) banks, stupid!
If you don't risk, you don't ever have to lose.
  • #11
  • May 9, 2011 5:23am May 9, 2011 5:23am
I haven't read the entire attached file, but what I read was good. Read it if you want to know how the euro affected the Forex market.
Attached File(s)
File Type: pdf euro.pdf   623 KB | 1,425 downloads
The nail that sticks out gets hammered back in
  • #12
  • May 9, 2011 5:55am May 9, 2011 5:55am
Quoting Noloqy
I haven't read the entire attached file, but what I read was good. Read it if you want to know how the euro affected the Forex market.
This looks very interesting, thank you for posting. I couldn't help but notice it was authored by De Nederlandsche Bank (central bank of The Netherlands). This suggest there could be all kinds of interesting papers lying around the websites of 17 central banks that are part of the euro area. Add in the ECB too, of course. I know from previous experience that central bank websites are goldmines (I've dug up some very interesting stuff from the Fed and BIS), but I never though about looking for papers of this particular topic. Thanks again, Noloqy.
If you don't risk, you don't ever have to lose.
  • #13
  • May 10, 2011 6:16pm May 10, 2011 6:16pm
Thanks again Bug and Nology. Im in the process of reading up on the things you guys suggested now. Very interesting.
  • #14
  • May 22, 2011 2:18pm May 22, 2011 2:18pm
Quoting shocfacter
Does anyone have any insite on what would happen if Greece pulls out of the Euro?...
I personally think that the idea of countries going back to their original currencies is a bit apocalyptic. It is true that Greece might spread out from the Eurozone, but you have to understand that it is not a MAJOR currency: it is only a medium size economy, and its affect won't be the same as if Germany or France would leave the Euro. However, if it does happen, expect the markets to act crazy and volatile. Remember what happened to the Euro just a year ago when the huge depths were revealed. Nevertheless, I don't think that traders have something to be afraid of. From my experience, I had the most successful trades when big crisis occurred. So in a way, I am looking forward for things to get "interesting" if you will; though I wish things will turn out in the best way for the Greek people.
Good Luck to us all!
  • #15
  • Jul 29, 2011 11:14pm Jul 29, 2011 11:14pm
Who would have thought that WE, The United States of America, would be in the very same position the Euro zone was in just a few months ago when I first started this post wondering what would happen to the Euro if Greece defaulted.
  • #16
  • Jul 30, 2011 12:55am Jul 30, 2011 12:55am
Quoting ChrisJMan
I personally think that the idea of countries going back to their original currencies is a bit apocalyptic. It is true that Greece might spread out from the Eurozone, but you have to understand that it is not a MAJOR currency: it is only a medium size economy, and its affect won't be the same as if Germany or France would leave the Euro. However, if it does happen, expect the markets to act crazy and volatile. Remember what happened to the Euro just a year ago when the huge depths were revealed. Nevertheless, I don't think that traders have something...
As the capitalist system goes through the birth pangs of globalised speculating, volatile markets will become the norm. Greece will be a distant memory (having been relegated to a marginal leisure economy) in a few years and we may well find the EZ contracting, speculation will however have risen to the next level.
The road to pipland is arduous and fraught with challenge.
  • #17
  • Jul 30, 2011 5:55am Jul 30, 2011 5:55am
Quoting shocfacter
Who would have thought that WE, The United States of America, would be in the very same position the Euro zone was in just a few months ago when I first started this post wondering what would happen to the Euro if Greece defaulted.
This kind of attitude is exactly what got the US into the mess they're in right now. Being over-generous with political promises and maxing out the national credit card when demographic and other trends are not in one's favor is something that most Western nations can be blamed for. But the case for the US is a bit special - they've always seen themselves as special in some way (the greatest nation on Earth, home of the brave, only in America etc.). As a result, the US has never had to prioritize its spending of resources, financial and natural. The problem with being number one, as the US was for some time, is that you have the very real potential of losing your focus. I'm sure as traders you all know what that means for your bottom line.

In the end the US will have to start acting like a grown-up. The same goes for its citizens. They have to wake up and realize that it's a different world out there with many nations now out-competing the US in several categories (auto production is a good example). There are companies like Caterpillar and Boeing that serve as good examples of America's potential, but unfortunately a lot of that potential has been wasted via wasteful resources investments (examples: housing boom, suburbanization, too big cars). I seriously hope they (and Europeans as well) get their act together after this crisis has hit rock bottom - I would much rather see the West dominating the world (for me, it's largely a matter of public speech, human rights and overall civility in the way our societies are organized).

PS.I don't think much of US politicians and I'm not someone who likes to bash the US, I'm just outlining what I think is the general theme connecting all the different financial problems in the US.
If you don't risk, you don't ever have to lose.
  • #18
  • Aug 6, 2011 3:05pm Aug 6, 2011 3:05pm
Quoting bug
This kind of attitude is exactly what got the US into the mess they're in right now. Being over-generous with political promises and maxing out the national credit card when demographic and other trends are not in one's favor is something that most Western nations can be blamed for. But the case for the US is a bit special - they've always seen themselves as special in some way (the greatest nation on Earth, home of the brave, only in America etc.). As a result, the US has never had to prioritize its spending of resources, financial and natural....

And now the loss of our AAA. Jesus H Christ what next?
  • #19
  • Sep 6, 2011 10:44pm Sep 6, 2011 10:44pm
Ok so I think we have to revisit my origional question that started this thread? But this time im interested in what some of you guy's trading strategies would be if the Euro falls because it seems even more likely now than it did when I origionally posted. What a shame to. Euro made everything so nice and tidy. From what I understand, PRE Euro trading was very hectic and all over the place. Anyone on here have any trading experience from way back on those days? It would be nice to hear your perspective of what it was like to trade then because we MAY just be heading back to those days.
  • #20
  • Last Post: Sep 13, 2011 8:07am Sep 13, 2011 8:07am
Quoting shocfacter
And now the loss of our AAA. Jesus H Christ what next?
like it even matters? lose AAA rating and bonds go to all time highs.

nobody really knows what will happen if greece exits. my thinking is some sort of eurobond (with china being a large buyer) to help stabilize the markets while greece gets kicked out. the wildcard in this dance is nobody knows the exposure banks have on both sides of the pond.
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