(Bloomberg) May 21, 2012 — The euro has weathered the worst financial crisis since the Great Depression, bailouts of Greece, Ireland and Portugal, and falling interest rates. Now, investors are betting like never before that a Greek exit would be too much to keep the 17-nation currency above its long-term average.
Hedge funds and other large speculators, which pared trades that would profit from a drop in the euro to the lowest levels since November, rebuilt them to a record high last week, figures released May 18 by the Washington-based Commodity Futures Trading Commission showed. The premium for options that grant the right to sell the euro has more than doubled since March.
Through most of the financial and political turmoil in Europe, the euro held above the average since its January 1999 start as investors put their faith in German Chancellor Angela Merkel to keep the monetary union in place. While they currently forecast little change in the euro versus the dollar, a majority of the world’s biggest foreign-exchange trading firms surveyed by Bloomberg News say the loss of even a weak member such as Greece would risk more departures and send the currency lower.I don't understand the logic (or the lack thereof) of Alan Ruskin, yet another member of the "Super Incompetent Strategist Team", who thinks that removing the weakest links from a chain, makes the chain weaker...
“Financial markets’ great fear is that if one country left, it would not necessarily be the last,” Alan Ruskin, the head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank AG, the largest currency dealer as ranked by Euromoney Institutional Investor Plc, said in a May 14 telephone interview. “Removing one country, however weak, would not be a route to a stronger common currency.”
The average year-end estimate for the euro among the biggest trading firms is $1.28, ranging from as low as $1.15 at UBS AG to as high as $1.44 at HSBC Holdings Plc. Deutsche Bank forecasts a drop to $1.25 next month before rising to $1.30 by the end of December.
The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 1 percent since March against a basket of nine developed-market peers. It slipped 0.1 percent to $1.2765 as of 4:22 p.m. London time after weakening 1.1 percent in the five days ended May 18 to $1.2780 as post-election attempts to form a ruling coalition in Greece broke down.
“Having the history of an exit would make the market think it can happen again,” Greg Anderson, the North American head of Group-of-10 currency strategy at New York-based Citigroup Inc., the second-largest dealer, said in a May 14 telephone interview. “That would lead to endemic weakness.”
CoT report, courtesy of ZeroHedge: