17th December Euro Outlook
17th December 2009
Currency Overview
Focus on Spot EUR/USD (Euro)
This last week has seen the Euro trend sharply lower again, taking out key support levels to the 1.4300 handle. The USD has been on a good up-trend in recent weeks, on the back of participants scaling forward expectations of Fed policy tightening. Carry trades against the USD are also being unwound at a sharp rate, with the Aussie and Kiwi taking a hit of late.
Thoughts from the trading floor
The Euro broke through the daily bear flag we touted last week, on the Thursday, and took out the important 1.4626 daily swing low. This morning, the market has pushed strongly lower once more, taking out key support at 1.4480 and 1.4449. This pushes the market back into the “congestion” area from the summer, where we could see a small bounce. Although, technically, the market remains short-term bearish below the 1.4480 and 1.4449 levels. This favours a move steadily lower to the 1.4000-1.4050 area. Further deterioration below here would then shift the market into a medium-term bear trend. A recovery through the 1.4500 handle and then 1.4626 will be required to ease the bearish momentum for the moment.
The USD has rallied in recent weeks, since the NFP number earlier this month. As participants scale forward expectations of Fed policy tightening, we have seen short-medium term USD shorts head for the exits at a rapid rate. With key carry trade currencies also taking a sharp hit, there seems to be a panic flight into the USD. Yesterday’s FOMC policy announcement was also slightly hawkish in its nature, which has caused further deterioration of the Euro and other key carry trade currencies. With respect to this, we may see participants completely pull out of the USD carry trade. Logically, this may result in a flight into the Japanese Yen carry trade. We may be seeing the short USD “bubble” being burst at the moment. This may drive the USD into a longer term bull-trend.
Bull View
The bulls will hope that the USD strength seen after the NFP number two weeks ago is unwound as one number cannot signify a trend. They will hope that the US economic outlook can return to its trend of 3rd and 4th quarter, where we saw a very slow and gradual recovery, allowing for risk on trades against the USD carry. They will need the market to stage a recovery going back above the 1.4500 handle to prevent a further sharp liquidation of longs.
Bear View
The bears will see the current climate of uncertainty as an opportunity to make up for lost ground. The panic flight of long positions seems an ideal opportunity to push the market into a medium term bearish trend.
Futex View
We favour the bears. We feel that the uncertainty surrounding government fiscal situations and the prospects of sovereign downgrades hurting risk appetite to be too great to ignore (as discussed last week). Even if the markets recover somewhat going into Christmas, the start of next year may be the time for the bad news to come out of the wood work.
