EUR Just Not Letting Go Of The Default Trade
FX Daily | Mar 26, 2018 07:09
Over the past year or so, we have seen the EUR gaining from strength to strength, pushing hard against the USD which in the current climate seems to be getting little reprieve from the political backdrop required to instill confidence in any currency.
As we saw on Friday, the fallout in equities saw a rush for the safe havens, of which the USD has clearly fallen out of favour, and replaced a while back by the EUR, which is also benefits when risk appetite is healthier amid the constant reminder of the the robust recovery in the euro-zone. The latter forms the basis on which many believe the ECB are falling behind the curve, but with inflation lagging - and this partly down to persistent surges in the EUR - the governing council have clearly been reluctant to call the end of QE for fear of another overreaction, which has taken hold of the JPY as the market calls, or rather pre-empts BoJ normalisation down the line.
These 'pro-active' moves have been excessive in nature in more recent times, just as we saw with the BoC hikes prompting sharp gains on the rates curve as well as the CAD, but which have been sharply reversed, albeit with the overhang of NAFTA uncertainty which has been prevalent over this time.
With the EUR, it is the exchange rate which has been running away with it, less so rates as safe haven demand keeps short date German paper (in particular) bid to keep rates negative out to 5yr. Spreads with the periphery are the focal point as a result, and have narrowed to some degree though naturally we saw Italian BTPs come under pressure during the elections. This only resulted in a minor dip in the single currency, with long exposure still relatively high despite the spot rate clearly looking overstretched above the 1.2500 mark.
As ECB policy is inevitably on the turn, we once again expect economic divergence to start showing the strains on the level at which the various member states expect monetary policy to be. It is no surprise to see the German contingent leading the calls for the ECB to call time on the APP, but even the Buba's Weidmann has conceded that rates will only rise well past the date bond buying cessation. Given this to be the case, we struggle to see what this insistence on forward guidance at this stage will do (rather than actually implementing it), given German business sentiment is starting to show concerns over the level of the exchange rate, and more so now when trade tensions are reaching fever pitch.
Rather than join the chorus looking for a EUR/USD move up to 1.3000 this year, which is in part predicated on further USD weakness, we continue to see a move back down to 1.2000 at some stage, but this does not rule out another stab at 1.2500, perhaps the 1.2600 level where we can only see exhaustion setting in again. If we do test higher levels first, this will then be the fourth (or fifth) time we have stalled at higher levels, the last episode falling shorting in the mid 1.2400's.
Get The App
We highlight this pair due to the continued exposure levels as well as the overcrowded USD shorts in the market, which are also vulnerable to activity in the equity markets, based on a potential follow through into emerging markets and a (USD) squeeze as a result.
h3 EUR/USD DAILY CHART/h3Looking to some of the other currency pairings, EUR/JPY has come some way south of the highs seen closer to 137.00-138.00 this year, but on the daily charts has a lot of room on the downside before we reach value levels highlighted in the 115.00-110.00 area. In contrast, USD/JPY failed to test the 114.00-115.00 area before heading south, and has clawed its way through 105.00, but with limited momentum given the lack of breathing space north of 107.00. These are key technical factors which are worth considering, as we can no longer ignore the developments in the stock market, which are not only down to fears of a trade war, but of a Federal Reserve maintaining their gradual approach to rate normalisation.
The ECB would have perhaps been hoping for a more hawkish 'delivery', but will have to delay the inevitable in the hope that the market finally takes note of interest rate differentials, which have been roundly cold-shouldered in this era of trading off expectations even further out on the horizon.
As an aside, we saw the USD reaction to last week's rate hike as borderline bizarre, and if anything, more constructive for the greenback given an immediate move to 4 hikes this year would have flattened the Treasury curve. It didn't.
h3 EURUSD WEEKLY CHART/h3Disclaimer: All information and content in this article should be viewed as educational only. Although the author, FX Daily Ltd. and its contributors believe the information and contents to be accurate, we neither guarantee their accuracy nor assume any liability for errors. The concepts and methods introduced should be used to stimulate intelligent trading decisions. Any mention of profits should be considered hypothetical and may not reflect slippage, liquidity and fees in live trading. Unless otherwise stated, all illustrations are made with the benefit of hindsight. There is risk of loss as well as profit in trading. It should not be presumed that the methods presented on this website or from material obtained from this website in any manner will be profitable or that they will not result in losses. Past performance is not a guarantee of future results. It is the responsibility of each trader to determine their own financial suitability.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.