Understand and Profit from Surging European Volatility
Stock-Markets / Financial Markets 2014 Aug 18, 2014 - 05:19 PM GMTBy: Money_Morning
Peter Krauth writes: With the Ukraine conflict advancing to new and dangerous territory, Russia refuses to take Western sanctions lying down.
Led by autocrat Putin, the former Soviet nation is striking back, and as of mid-day Friday the blows remained primarily economic.
And that's where I want to focus today...
Each side continues upping the ante, with ever stronger retaliatory sanctions.
Economic skirmishes like this can quickly escalate into all-out trade wars, where even the victors lose.
But you don't have to be another victim. There are steps you can take to mitigate... and profit.
The Aim of the Latest Round of Western Sanctions
The latest round of Western sanctions were aimed at Russian financial, energy, and defense sectors.
It's a vicious tit-for-tat downward spiral with Russia responding with a ban on nearly all food from the West, including fresh produce, meat, and dairy products.
That hurts.
About 10% of the EU's agricultural exports, with a value of nearly $15 billion annually, end up in Russia. Both sides suffer, with Russians having grown used to quality meats and fresh fruits and vegetables and now left with limited alternatives.
Some of the hardest hit in the EU are smaller nations. Greece, for example, trades more with Russia than any other partner. Yet now fresh fruit is being turned back at Russia's border, relegated to rotting in refrigerated trucks.
And in a further nose-thumbing move to the United States, Edward Snowden was just granted a three-year extension to stay in Russia.
But it's what Putin's doing behind the scenes that shows just how serious he is about diversifying away from reliance on the West.
Russia Looking East Will Hit Western Currency
A few months back I told you about Iran's trend toward openness. Its new generation of oil contracts appears aimed at attracting foreign oil partners.
Yet despite the apparent olive branch extended west, Iran has kept its options open, and may instead be looking increasingly east.
On Aug. 5, Putin agreed to a $20 billion trade deal with Iran.
According to Russia's Energy Ministry, the 5-year agreement will have Russia facilitate Iranian oil sales and "cooperate in the oil-gas industry, construction of power plants, grids, supply of machinery, consumer goods and agriculture products."
The deal could lead to Russian purchases of half a million barrels of oil daily, representing 20% of Iranian production and fully half of its exports.
While details of this deal are still limited, I can't think of any reason Russia and Iran wouldn't seize the opportunity to further wean themselves off the petrodollar and settle all transactions in their own currencies.
If you've been following me recently, then this certainly won't surprise you.
In late May, I told you about two major deals signed at the end of a two-day trip Putin had made to China.
The 30-year deal by Gazprom to supply natural gas to China valued at $400 billion made the biggest splash. But perhaps more interesting, and certainly more subtle, was the deal between one of the largest Russian banks, VTB Bank, and Bank of China.
Sidestepping the U.S. dollar entirely, the two agreed to pay each other in domestic currencies for transactions in trade finance, inter-bank lending, and investment banking.
If there's any doubt left in your mind, consider this...
According to Reuters, just last Thursday, as Putin was visiting Crimea (recently annexed from Ukraine), he said Russia should aim to sell its oil and gas for rubles globally because the dollar monopoly in energy trade was damaging Russia's economy. "We should act carefully. At the moment we are trying to agree with some countries to trade in national currencies," said Putin.
It's a trend that is not going away, and it keeps gaining momentum with each new round of Western sanctions.
How to Protect and Profit in Nerve-Rattling Volatility
So how can you protect yourself against a weakening U.S. dollar?
Most obvious would be to simply not hold too much of it and maybe even to short it.
But right now the euro deserves more of your attention. Here's why...
The double-whammy of an already weak economy and the prospects of it worsening from Russian sanctions mean the European Central Bank knows its currency needs to weaken, so quantitative easing is well within sight.
Ideally, that will boost exports and lift inflation somewhat. But a weaker euro typically means a stronger U.S. dollar, at least for a while.
So rather than shorting the dollar right now, consider shorting the euro through the ProShares UltraShort Euro ETF (NYSE: EUO). This fund aims to generate twice the inverse daily returns of the dollar price of the euro, potentially doubling your gains on the euro's downside.
Europe will pursue QE since its currency is still too strong and inflation's nowhere to be found. So I expect a weaker euro to continue, and it's still worth adding some ProShares UltraShort to your holdings now.
Another option is to follow the lead of Russia's own central bank.
Interestingly, as Russia's treating the dollar like a hot potato, it's aggressively building its own gold reserves.
A recent IMF report shows the Russian central bank increased its gold holdings by 1.5% in June alone. What's more, in the five years since 2009, the country's gold reserves have nearly doubled.
The Ukraine-Russia conflict continues to deteriorate. A trade war is escalating and open military conflict between the two countries opening up. Given the Russian snubbing of the dollar and favoring gold, that's a huge thrust pushing the commodity higher. It's a lead that, like the war, will not abate soon.
Source : http://moneymorning.com/2014/08/18/understand-and-profit-from-surging-european-volatility/
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