of Europe, it was truly remarkable just how one-eyed and
confident market consensus was that it would be strong. I traveled
through Europe visiting clients in the months before its
float. So intense was the view from absolutely everyone I met
with that the euro would go up once it had floated that only one
conclusion could be reached. It was clear to me that the euro
would fall dramatically in its first 12 months. In this case, it was
the consensus view that totally determined my market view, due
to the sheer intensity and confidence of the market.
When everyone is that confident of their beliefs and talking so openly
about them, you can be sure of one thing: They have already
bought. If everyone has already bought (sorry to put it so
bluntly), how can it go any higher? In effect, everyone had
already bought euros by buying the deutsche mark and French
franc, the most liquid currencies that would be automatically
converted to euros on the first day of the new currency. Some of
these buyers would become sellers to square their positions, and
then there were the real sellers—the importers and people
investing overseas from Europe. What were they doing? Waiting
for the euro to rally so they could sell at a better level.
My forecast was for the euro to rally for one to three days and
then collapse for the next 12 months, predominantly because
all the buying for the next 12 months that European exporters
would normally do had been done in advance and because currency
traders had also already bought into the euro. Such was
the conviction of the consensus view. Again, forecasting the way
I had meant that it was a challenging time for me. This time,
working for a European investment bank, I was warned that
my forecast could cost me my job. Fortunately for me but not
for the bank—which was positioned, like everyone else, long
the euro—the currency did go up for three days and then collapsed
for the following 12 months.
Read More: A Contrarian Position on the Euro
