With an overwhelming "no" vote by Greece on its bailout referendum Sunday the country is likely headed to a rough exit from the euro. Those fears should cause the currency to plunge on fears contagion will spread to other members. European stock indexes will drop sharply this week as well. Indeed, the single currency initially plunged by more than a percent in early Monday Asia trading.
Yet there's another theory floating around.
"The big trade has been to go long European equities and short the euro," Brian Kelly of hedge fund BKCM wrote to clients Sunday. " As European equities fall, investors will unwind this trade, which means short covering in the euro."
This so-called pair trade is a popular one among macro hedge funds around the world. It is also a mandated move for some U.S. exchange-traded funds that seek to hedge out currency risk, by placing bets against the euro as it buys European equities.
"It is counter-intuitive, but if the strength continues (in euro/dollar from last week) everyone will be wondering why the euro did not fall. This is why," said Kelly.
The hedge fund manager cites a stat from Goldman Sachs estimating that for every 1 percent drop in the Stoxx Europe 600 Index, 6 billion euros needs to be covered.
There's also more short-covering expected from the contingent that has successfully bet against the euro since the start of the year, when it was trading at $1.20. (In the wake of the referendum, it was trading at $1.10.)
To be sure, buying the euro here is a risky trade and is likely just for the very short term. Longer term, the euro is likely to come under pressure, many investors said, as the crisis spurs the European Central Bank to buy more debt to stem the contagion.
Some investment banks predicted that this quantitative easing could happen as early as this week.
"Confirmation of a 'no' vote would probably raise the chances of ECB support eventually, thereby supporting our view that euro/dollar falls to parity by year-end," said Citibank's Jeremy Hale.
Yet there's another theory floating around.
"The big trade has been to go long European equities and short the euro," Brian Kelly of hedge fund BKCM wrote to clients Sunday. " As European equities fall, investors will unwind this trade, which means short covering in the euro."
This so-called pair trade is a popular one among macro hedge funds around the world. It is also a mandated move for some U.S. exchange-traded funds that seek to hedge out currency risk, by placing bets against the euro as it buys European equities.
"It is counter-intuitive, but if the strength continues (in euro/dollar from last week) everyone will be wondering why the euro did not fall. This is why," said Kelly.
The hedge fund manager cites a stat from Goldman Sachs estimating that for every 1 percent drop in the Stoxx Europe 600 Index, 6 billion euros needs to be covered.
There's also more short-covering expected from the contingent that has successfully bet against the euro since the start of the year, when it was trading at $1.20. (In the wake of the referendum, it was trading at $1.10.)
To be sure, buying the euro here is a risky trade and is likely just for the very short term. Longer term, the euro is likely to come under pressure, many investors said, as the crisis spurs the European Central Bank to buy more debt to stem the contagion.
Some investment banks predicted that this quantitative easing could happen as early as this week.
"Confirmation of a 'no' vote would probably raise the chances of ECB support eventually, thereby supporting our view that euro/dollar falls to parity by year-end," said Citibank's Jeremy Hale.
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