European discord triggered a rise in the dollar and a drop in stocks during May, much as was the case last year at the this time. For the month, the S&P 500 is down more than 7% while the dollar has gained more than 6% against the euro. There are more meetings and Greek elections on the table for June, but the market has all but lost faith that a definitive solution will be reached. As a result, shorting the euro has become the most popular and overcrowded trade on the Street.
According to Jon Najarian, co-founder of tradeMONSTER.com there are signs that an ugly reversal could be coming for euro bears. "If they kick Greece out you could see the euro go to $1.30 like that," Najarian says of euro zone officials, with a snap of his fingers.
On the surface, kicking Greece out of the euro zone nations would be a complete and utter disaster. Currencies are, in theory, backed by the assets and resources of a central government. Letting member nations come and go makes the actual value of the euro unknowable, as it's unclear exactly what stands behind it. Said another way, if Greece leaves the euro as it exists, it is worthless, meaning a whole new currency would need to be created.
At least that's what would happen if modern finance had any connection to the lessons taught in economics classes all over the world. In the real world the former Chicago Bear says the European officials are going to "use Greece as an example" by letting/forcing Greece to go back to the drachma. Once that happens, the drachma will be worthless, no matter how it's measured, and all bets are off as to what will happen to Greece.
As Najarian sees it, the finality of a Greek exit will put a bid under the new and improved euro. With so many traders leaning to one side of the euro trade, any reversal is likely to be dramatic. Najarian says the options market is showing signs of strain already.
Volatility in options for the ProShares UltraShort Euro ETF (EUO), a trading instrument intended to move $2 higher for every $1 drop in the euro, has moved from 21 to 26 in recent sessions. If at two, fold leverage 26 is a huge amount of volume for a currency. According to Najarian, "that's probably telling you my scenario of that Greek exit is about to play out, and you're about to see a turn in the euro."