OK Lets talk about the Euro

I could not have a picked a better day to explain how a hedge fund manager thinks, rightly or wrongly, about the Euro and the opportunities to make some potential gains. Yesterday we saw Euro sell off over 2% as finally the realities of the European single currency in the wake of a debt problem became apparent. The interesting thing is I don't think many managers made money yesterday. Most traders have tried all year to sell the Euro but unsuccessfully. As ever this move came just as most people I talk to have said that they were giving up trying to sell it. It was for exactly this reason that I had last friday sold some.  Today we are seeing the Euro gain ground and now the rest of the investment community, those who missed the boat yesterday, have to decide whether they want join in the selling at a decent level or believe the politicians can come up with a quick solution to restore market confidence. Obviously given my actions last friday I believe the Euro must devalue. Here is my rationale: this is not about blaming Greece or Italy, even though the one thing they do have in common is an inability to collect taxes from the ultra rich. This is about the poor foundation the Euro was originally built upon. Firstly there was never enough sovereignty given from the members of the single currency to allow it to survive in stressful times. A central powerful institution who is a true lender of last resort is required. Also the existing legislation is inadequate to allow for the flexibility that is needed.  Secondly lets presume that this can be addressed now comes the biggest problem: what would be the correct monetary an fiscal policies to employ given the vast cultural and economic cyclical positions of each individual country. Ok let me explain because that sentence sounded like I was an academic or worse an economists. Lets look at two different countries Germany and Greece. Germany economy is doing OK in hard times, it has benefitted from exporting to Asia as well as within the Eurozone. Germany biggest fear is inflation. Historically many blame inflation as the catalyst that eventually led to Nazi Germany. Greece on the other hand is going through a depression with decreasing growth and rising unemployment, now approximately 18%. Greece's biggest industry is tourism and that is the key to reviving the Greek economy. Therefore Greece needs a lower Euro so holiday makers will choose it as a location over non euro destinations. However the policies that are needed to consciously reduce the Euro in value would be seen in Germany  as inflationary. Question: what would an independent central all powerful European financial institution do? Who knows...So given that the task would be hard enough with the right political will backed by appropriate European treaties conferring sovereign power what chance does the Euro have without this? So how do we analyze todays market movement as Euro is up over 0.6%. Easy..its human nature. After yesterdays sell off it is only natural that today many market participants believe the move was "overdone". These participants tend to be short-term traders who sometimes miss the greater picture. This combined with other human attribute that it is a lot easier to believe the world is fine, that central banks are in control, rather than believe the world is completely economically messed up and market forces are greater than any political will makes it logical why today should be a positive day for the Euro.  What today does provide, and maybe the positive feeling extends for a few days, is a chance to sell the Euro again. For someone like myself who already has sold the Euro and is profitable it gives a greater chance to add to a position. This is how markets work. Its a combination of fundamental, technical and market psychology that provide for money making opportunities. At anytime one these three elements dominates but never do they dominate for ever. The key is either work out which one is prevalent or to work out which one suits you better and risk manage accordingly.