Last Saturday, I dropped this tweet below which prompted a few colleagues to ask me how I got there. Today I wanted to share my rationale with everyone as I still believe it to be relevant.
Get some coffee as this may be a long one.
Rejoice, Euro bulls.
1.15+ is en route
— Rafael Rosa (@RemixTrades) August 16, 2015
First, let’s be sincere and acknowledge that we’ve been here before. Back in May, I thought that we might probe 1.15 (see The Battle of 1.15). As noted on the post though, I had been trading the Euro long up to the 1.14 handle (remember those annoying “Bill Gross is on my side” tweets?) but did not see the risk/reward in going long at those levels. After that weekend, the ECB dropped some comments about front-loading asset purchases and the Euro started a down trend to 1.08. For those following me on Twitter, I had a failed trade at the 1.11 zone and then joked that I would be buying Euros at 1.0750, 1.05, etc. As we rallied off 1.08 (I was there chirping longs again, see Third Update on the Euro) and later in June I had another post looking for 1.1420 and 1.1490 (see Is this how we get to 1.1490 on Euro?). Per this last noted post, I was also very bullish on Cable and thought that oil might break $63 to the upside. We got 1.1420 on Euro, Cable hit the targets, but oil went nowhere (and eventually we know what happened).
Why am I repeating all of this? So people who haven’t read my stuff can have perspective on my thinking for the last few months. Have I been bearish the Euro and just turned bullish? Have I been beating on the same dead horse for months? What was my thinking last time we were around these levels?
Now that we’re back to the top of the range, everyone is asking the same question: is the third time the charm? Try to say that question 5 times really fast…. :).
Do we have what it takes to break 1.15, or at least challenge it?
I dropped the 1.15 tweet last week because of the following (and all of these still apply):
Stan Druckenmiller went huge on gold. No matter how you slice it, this is a bet against the US dollar too. My new motto: “
Bill Gross Stan Druckenmiller is on my side“. I could just stop here…
Oil and commodities (ex gold and silver) had continued to decline with oil likely to test $40. First, while it is true that lower oil likely dampens inflation expectations in both the US and the Eurozone, a lot of people have been missing out on the proper way to look at this paradigm. The ECB has set monetary policy until September of 2016. Thus, short-term lower oil movements will not spur changes in their policy anytime soon. Draghi fired the bazooka and will be at the sidelines for many months. Additionally, their currency is down over 20% versus the USD (think positioning). The Fed’s situation is a completely different story. The Fed’s policy direction is up in the air with the possibility of changes in the next 30 days – with a monster bias for rate hikes.
Thus, this means that oil’s effect on the USD (i.e. elasticity) is much greater than on the Euro. For every dollar that oil drops, the effect on the expectation of the Fed’s decision is much greater than on the ECB’s decision (which is nowhere in the near future). And if you think about it, most of the other major central banks have current policies that could change in the near future (e.g. Bank of England, People’s Bank of China, Reserve Bank of New Zealand, Bank of Canada, Swiss Central Bank, and to a lesser extent the Reserve Bank of Australia). Any surprise that the Euro is winning big time against all of these guys?
Note that the point above deals with oil’s effect on inflation expectations, not inflation itself, which is the third point (probably the most important one).
As we know, US ECI was horrendous a few weeks ago, PCE continues to be at 1.3%, and headline inflation continues to be near zero. Year-over-year final demand PPI also came in at -0.8% last week.
Going into the FOMC minutes, I saw it as obvious that the inflation talk would not be USD positive – there was no way for it to be so (assuming the Fed is truly “data dependent”). This is a big reason why I dropped the tweet on Saturday – this was one of the possible catalysts for a jump higher. This is true especially if you take into account the continued slump in commodities and the fact that the Fed had removed its comment about energy prices having stabilized. Given the change in language on the last FOMC statement, how would the minutes show positive comments toward inflation? Well, unless they said something like “energy prices are no longer stable but we somehow think that is positive for inflation?”…which makes no sense.
This is why I had a bid out right before the minutes and quickly went long EUR/USD as they were released and the EUR/USD held ground.
Screw the bid
Lift the offers
— Rafael Rosa (@RemixTrades) August 19, 2015
In my opinion, the second catalyst could be the Jackson Hole conference this upcoming week. Even last week, we already knew that inflation was going to be the main topic. You tell me how any of the points made on this conference will be that inflation is about to roar? And if you’re thinking about rent inflation in the US, it’s a supply problem and the Fed is likely well aware of that. Raising rates will not slow rent inflation, increasing supply will.
Euro core inflation (year-over-year) had come in at 1.0% and year-over-year growth had come in at 1.2%. Seriously,it’s amazing to me that some people saw this growth number as bearish. The year-over-year number was better than last quarter and continued its uptrend. Sure, the market was looking for 1.3%, but that “miss” is the most meaningless thing in the world. The number was still 1.2%.
It’s a bad number because a bunch of economists got together and their medium forecast was 1.3%?
In my opinion, this is one of the biggest crimes in financial news media – they put people’s focus on the small beat/miss relative to the “consensus” instead of focusing on the actual number relative to the past numbers and the trend.
Moral of the story: Euro inflation continued to tick up (and the ECB is a single-mandate central bank focusing on inflation) and growth was coming along once again. While this may not affect your day trades, it should likely affect one thing: it puts the idea of EUR/USD 1.05 further out of question.
The market has been caught up in the “China story” lately. Greece out, China in. The Greece snap elections did not even take out 10 pips from the Euro.
For anyone watching the economic calendar last week, you knew that the China Manufacturing number was to be released and we were looking for a lower number relative to the last month. If you thought equities might sell-off on this, it was a Euro positive given the current correlation we have.
We get China Manuf. PMI tonight (exp 47.7) If this comes in weaker, I think the “China story” could push equities off the cliff tomorrow — Rafael Rosa (@RemixTrades) August 20, 2015
Well, the number was worse than expected. We all know what happened on Friday and it’s not like that number is going to change on Monday.
It’s funny how the USD/JPY did not react violently to the number, it moved some 10 pips. For anyone up during the Asian session, it was essentially free money, which does not happen often in FX.
#USDJPY….always so slow to react in Asian session….123.31
I think magic might be in Yen & Yen pairs today
— Rafael Rosa (@RemixTrades) August 21, 2015
I think this is a gorgeous setup. If 123 breaks, we’ll likely get 122.30s So can do 3:1 risk-reward 30 risk for 100 pic.twitter.com/8vd4yYhXLL
— Rafael Rosa (@RemixTrades) August 21, 2015
Now we get to some technicals.
First, lets start with some bigger picture stuff. I haven’t seen anyone talk about this pattern below (well, I haven’t really been around either :p). The EUR/USD has been forming a bigger mirror picture of what it did from March to the beginning of April. I’m not a big fractals type of person, but this double-top attempt thingy with an extension is something I’ve been watching for a while. It points to above 1.15
Before last week, the EUR/USD held the 1.08 level and then broke market structure (i.e. took out the recent swing high) on the daily chart. With this mind, the daily was bullish and we had the possibility of a flag assuming we got some squaring of positions into the FOMC minutes release.
The pair had also left two equal highs that were very suspicious (1.1187 and 1.1220s). Given all of the points above, I saw it unlikely that the Euro was about to break down and go to 1.08 or 1.05 – an opinion held by many EUR/USD bears.
Before the FOMC release, I put this out:
If #EURUSD is to rally, look for the liquidity pools at 1.1187 and 1.1224 to be taken out
Equal highs, too obvious pic.twitter.com/gEPzMOjPQM
— Rafael Rosa (@RemixTrades) August 19, 2015
Thus, if this flag was to happen (note that this is my thinking before last week), we would potentially be in the high 1.13s or 1.14 handle.
If got up there again, given the fundamental and expectation factors noted, the probability of challenging 1.15 had likely reached a tipping point.
The US Dollar Index (/DX) had a double top that corresponds to the EUR/USD reaching the 1.14 handle. Again, this would bring us to the question above: Are we going to just top out at 1.1450 again?
Note that per technical analysis, you would buy the DX when it reaches those targets on the double top and bearish flag. Thus, this is a reason why we could see a retracement on EUR/USD (and thus why maybe we get that 1.12 as mentioned further down). I’m not sure chartists can outweigh positions traders trying to get out though…
Summing it all up, we haven’t reached 1.1450 but we’re pretty close. The Euro had its best 3-day move since I don’t know when. Positioning is still very long USD versus the Euro. As Aurelija notes, shocks don’t favor the USD.
Markets are not forgiving. To think that the USD bulls will be saved on the third strike of the resistance level seems highly unlikely to me – especially because US inflation has not ticked up, US growth estimates have been continuously revised downwards, and Euro inflation and growth has gone up. Oh yea, the Greece thing is kind of resolved too. Thus, the Euro is in a better situation versus the USD relative to the last time it got up here.
Right now, I think the “best” location to buy EUR/USD is probably on a challenge of 1.12, assuming we get it as we go into the Jackson Hole conference (think about the same type of price action we saw pre-FOMC minutes….a big spike the week before with some position squaring in the first half of the week). If not, we’ll just have to hit the offers that are available.
While we could fail at 1.15, it’s important to note that a hold will likely be explosive. Literally every single sell-side bank has been bearish EUR/USD . After the Greece thing was over, most banks were like “we think short EUR/USD is the best way to express USD longs“. We all remember that line in every research piece, right?
If these banks (and their clients) are truthfully positioned for such downward price action, I say no more.
And none of them have raised their EUR/USD forecasts yet. Sorry, Normura just raised its forecast. How many more discussions are happening over the weekend?
So, why challenge 1.15 this upcoming week?
This week is probably as good as it gets given the Jackson Hole conference (i.e. catalyst). As always, manage risk and try to find good entry points that offer good risk-reward. No one can foresee the future, but we can definitely position appropriately for what may happen.
What are imminent signs that we’re about to challenge 1.15?
If the EUR/USD starts to consolidate above 1.1380 and the 1.14 handle. This means that the market has found value at these levels. The last two times around, sellers stepped in as we hit the 1.14 handle. If no one steps in fast as we reach those elevated levels, it means that they’re probably not there anymore.
And it does not seem like we’ll have a lot of option-related action at these levels trying to hold price down. There’s only one option strike of 1.1379 hanging out there.