Egypt and the Euro

As demonstrators face down tanks in the streets of Cairo, the US dollar has been rising against the Euro. Egypt and the Euro are, in fact, both on the front page of the news. The Euro had been recovering from a series of slides due to ongoing sovereign debt problems on the continent. Factors credited with the most recent fall of the Euro include the unrest on Europe’s flank and the fact that the European Central Bank seems unlikely to raise interest rates. The two factors have sent investors back to the Swiss franc, dollar and Yen. The fact that the European Central Bank will probably not raise interest rates in the near future is the common news in Forex markets that traders rely on. The news from Cairo could be substantially different. What happens in Egypt and the Euro value over time are strongly connected. The downward direction of the Euro due to sovereign debt problems on the continent could become second page news if Egypt dissolves into chaos. For thirty years Hosni Mubarak has been president of Egypt. He has continued to comply with the peace treaty that his assassinated predecessor, Anwar Sadat, signed with Israel. He has been successful in suppressing Islamic extremism in his country, at least on the surface. However, the price has been high in terms of lost individual liberties and an increasingly dictatorial regime. Despite the high price of stability at home in Egypt the regime of Hosni Mubarak has helped stabilize the region for more than a quarter of a century.

The news from Egypt and the Euro are tied for a number of reasons. Although Europe receives a large portion of its oil and natural gas from the Russia and the former Soviet republics it is still dependent upon oil from the Middle East. The Suez Canal is a lifeline for energy as well as an essential trade route. A severe political upheaval in Egypt could threaten Europe’s energy supply and access to foreign markets for trade. Add a Suez Canal shutdown to the debt problems plaguing the EU and Forex trading the Euro could become very active. Two approaches present themselves to the Forex trader in trading the Egypt and the Euro situation. One is to day trade the ups and downs of the Euro while keeping a close eye on the news out of Egypt. The other approach is to trade options on the Euro. As the Swiss franc, Yen and US dollar seem to be the designated safe haven currencies in this situation the trader could buy calls on Swiss francs, dollars or Yen with Euros and, if worst comes to worst, execute the contracts and buy francs, dollars or Yen with devaluated Euros after the fall. Likewise the trader can buy puts on dollars, Swiss francs, or Yen with Euros. Because of the symmetry of Forex trading this is the same trade.

In trading Egypt and the Euro, the above is a method for how to short the Euro in anticipation of a fall. Unlike simply selling Euros and buying them later, however, options trading the Euro protects the trader against the effects of Egypt reaching a peaceful solution to its political dilemma. Mr. Mubarak has had to deal with political strife before and has always survived. Egypt and the Euro may well both survive current circumstances. A peaceful solution is not impossible and, if that happens, the Euro could well benefit. As always our suggestion is not that the trader sell Euros or buy options but that the trader studies such situations with an eye toward learning how to profit in trading foreign currency.