Eurozilla hungry for 1.15

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.


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.


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.

EUro growth


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.


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.




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

Euro Daily Chart


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:



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.

FX options



Greek debt don’t matter

One last post on Greece.

I think it’s pretty clear that Greece is not Lehman Brothers – so I won’t go there again. For that kind of talk, see this previous post.

Here’s a quick roundup of the Greek debt done by The Guardian

That article points these crucial items:

  • Greek debt is about EUR320 Billion
  • 75% of the Greek debt is held by “the institutions” and such
  • They mention the ELA loans- however, this number is deceiving. Greek banks have had to put up good collateral for these loans (with Greek bonds not being accepted since the ECB dropped the special exemption). Even in a default situation, these collateralized loans would be in a relatively comfortable situation.
  • All of this Greek exposure equals about 3.3% of the Eurozone GDP per Barclays.

On this last point, I’ve seen people use it in what I consider to be a deceiving manner – saying “look, this much will disappear and we’ll be in deep trouble”. First, if Greece defaults, I doubt they’ll escape with paying nothing. They can be slick but not that slick.

However, the most important thing is that the Greek debt was never expected to be repaid tomorrow. That number extends for some 50 years with an average maturity of 16.4 years. Thus, nobody was looking to see that money at time soon. At the end of the day, the direct and immediate impact on the Eurozone economy is a fraction of the numbers that people throw around – I would extrapolate that for these reasons the market is like – screw it.

Lastly, the money used for Greece came mostly from governments that put funds into special programs and things of that sort. Let’s be serious, if that money goes poof, it’s not the end of the world. “The institutions” will be just fine if they don’t get the money.

I think of it like a cool Kickstarter project that you pledge $25 – it would be nice if you got the product and it worked, but you won’t be crying a river if it doesn’t work out (you may post an angry comment online,but that’s about it).

I promised not to mention Lehman, but I lied. Here are some things that Lehman was or did that Greece is not or does not do:

  • Be a  counterparty in trillions (notional amount) of derivative instruments.
    • Think about this one. That CDS where Lehman was on the other size, who was going to pay you on that daily mark to market?
  • An active creditor or counterparty in various loan markets
  • A larger debt load and a sizeable amount of commercial paper (i.e. short term loans that people expected to be paid pretty soon)
    • And when a guy like this doesn’t pay, everyone looks around and says “uh oh, what about if Merrill or Morgan Stanley doesn’t pay me?”
    • If Greece does not pay up, everyone will be like “dammit, why did I do that”. Very different market extrapolations.
  • Held very large amounts of other people’s money. How do you know those are not compromised?
  • And so on

Moral of the story: the Greek numbers really don’t matter. I agree with The Guardian – longer-term political and societal issues within the country could be the real problem. Those usually take time to develop though.


Euro trickery

What a day it’s been today. The Euro pulled the rug on everyone – first taking out any weak longs and then squeezing anyone who was late to the party.

The market had all weekend to think about the Greece thing. The net result was the Euro gapping some 200 pips, but that was it – nobody left to sell. As mentioned on yesterday’s post, the key was to solely watch price. Anyone who held positions based on a belief either saw their profits evaporate or lost money.

The US Dollar was initially up but is looking to finish down almost 1%. The EUR/JPY was the talk of the town. I went long during the London open and it worked out (out of it now). This is the chart I had posted at the time:

June 29 - EURJPY

We made a pop and then retraced 61% to a buy zone which also coincided with a 15-min order block. That was all I needed, especially given time of day. It was easy to define a 50 pip stop and see what happens.

There was also another thing that happened in the beginning of the Asian session that was in the back of my mind. Key “stop” zones in most pairs were hit. I say key because these were “continuation” areas where you would expect a lot of buy and sell stops. As these areas were hit and instantly rejected (while trapping a bunch of people), you knew something smelled funky (ala swing failure pattern). Based on this, I also took some other trades like this long NZD/USD. Chart from European session:

June 29 - NZDUSD

I missed an entry on this NZD/CAD and it’s up over 100 pips!! (current .8507). Same scenario.

June 29 - NZDCAD

The same applied for Aussie, GBP/AUD, AUD/CAD, EUR/CAD and a few others.

Going forward, we still have to be cautious this week. If price on the Euro and other risk assets turn, one must adjust accordingly or get crushed. However, 24 hours ago, the EUR/USD and EUR/JPY were end-of-the-world bearish. Now, it’s looks ultra bullish. It’s food for thought. This is also the type of environment where the “unthinkable” happens, such as EUR/USD 1.15.

I still haven’t forgotten about that 93.30 on /DX either (see post Reviewing the SFP on USD). If we get close enough, it’s a high probability event that we at least clear stops below 93.00/10.

Trades I still have on deck:



June 29 EURZD


June 29 - USDCHF



June 29 - GBPJPY


June 29 - GBPNZD


How to trade the Greek Mess – Q&A

Everyone is eagerly waiting for the Sunday open while FX brokers keep sending new emails and hiking margin requirements. Seems like it will be an exciting week.

Here’s a quick Q&A based on what I’ve seen on Twitter.

Will we see gaps at the open? Probably.

Should I open a position at the open? If you see a good opportunity with defined risk, it’s your decision. I have no positions and have no intentions of doing anything at 5PM Eastern. Buying/selling into a gap when liquidity is super thin and headline risk is large – why would I do that to myself?

What are people looking to do? Generally speaking, in times of panic, Yen and US Dollars rule.

Is there anything else that could support the above statement? I have screenshots of the long-end yield curve of all major markets. I did this on Friday as I was going to write a post about how it’s breaking out on the weekly chart. You have to think that this breakout will be at least halted, if not temporarily reversed . Rule #1 of Foreign Exchange – when yields drop (especially when it’s aggressive), be on the lookout for either Yen or US Dollar strength – or both.

Is the world going to end? No – however, traders trade first and ask questions later. One must trade the anticipation of the world ending and then look to reverse when the time is ripe.

Is Greece the next Lehman? No. See post If Greece Defaults, this is what will happen

Did the world end after Lehman? I’m still here at least. Wait, are you guys all robots? Is this the Matrix? oh crap….

When is the “world is not ending” buying opportunity? As you might imagine, nobody knows the answer to that question. However, the following strategy is probably the best: let there be a big rally first (in whatever security) and then buy on the 61-78% retracement with a defined risk parameter. No need to call bottoms. This could happen this week or months from now…

If Greece leaves the Eurozone, Portugal and Spain are next, right?

  • First, those countries have seen improvement. How about the “we’re not like the Greeks” narrative? It will come…
  • People forget but there are benefits to being in the Eurozone. You think their funding costs would be as low otherwise? Ha!
  • The Greek economy would likely see a disaster before it recovers (and remember, the recovery part is a probability statement, not destiny). Why would any country want to rush into that?
  • The slippery slope argument is called the slippery slope argument for a reason. See Wikipedia for starters.

There’s no way for Greece to leave the Eurozone, right? There’s always a way to do most things. This “there’s no mechanism” for an exit is silly. It’s like being at a door and saying “look, it’s closed, I can’t leave”. Have you tried opening it? Or putting a door knob there? Last case resort, you can always break the door too.

Is the EUR/USD going to parity? I don’t know. But know that this is the time when people with strong ideological beliefs lose a lot of money. If they believe the Euro is doomed, they’ll sell at any price and essentially have no stop-loss. If it doesn’t go their way, they’ll just watch as their losses grow and grow. Given that this is a high-profile situation, you’ll find plenty of journalists supporting either view – listening to either side is usually a 50/50 recipe for disaster.

What should I watch and who should I listen to? Watch price, listen to price, eat price. Think the Euro is going to parity? Well, if it starts going up, that’s something for you to watch.

Watch strong support and resistance levels – are they giving away? Are they being re-tested and failing? Are we making higher highs and higher lows or vice versa?

Will anything change this week? If there’s one thing to expect this week is change. We could go from default to no default and back to default in a span of hours.

Is there a high probability that traders get whipped by headlines this week? No answer on this one…

Will the Greek people vote to leave the Eurozone? I have no idea. But here’s a framework to keep in mind: When people are in a panic, they usually vote for the status quo. When in a panic, nobody wants to step into the unknown.



USD Bulls back in business ?

The US Dollar Index roared over 1% today led by a continuous tumble in the Euro and the Swiss Franc. The narrative I saw is that the market is looking past Greece and now focusing on fundamentals. Of course, this narrative concludes that fundamentals yield a lower Euro and an overall higher US Dollar from current levels.

A 1%+ move is not to be dismissed and definitely throws a rock or two at the bear case. However, from my perspective, it’s always good to step back and make sure if anything has actually changed.

Let’s go back in time again with the EUR/USD. It had a horrible weekly return some 5 weeks ago after failing at the 1.14 handle. If you go back to those days, the Euro “was done”. It had rallied, it had reached a key resistance level, it had failed. The parity crowd came out en masse. As we hit 1.08, the cry for parity got even louder. Guess what happened next? Back to 1.14! The point being – one day or one week momentum moves can sometimes lead you astray. Remember what happened the Monday after the recent US non-farm payrolls release?

(Side note: I’ll only become bearish EUR/USD if it breaks below 1.08 on the daily chart).

Am I surprised by the move in the EUR/USD? I’m definitely not surprised by the move itself, but the speed was definitely alarming. As stated on the post from Sunday (see: Charts and Trading Ideas for Monday), I shared the concern of some traders I follow (to give credit, they were @exploreFX and @trader1sz) that the stops sub 1.1200 were not cleaned. As a result, going into this week, I was not long the EUR/USD.

Note that this is the same concern I have with what happened on the US Dollar Index last week (see post: Reviewing the USD’s Swing Failure Pattern on June 18th). Need I say more?

Alright, now to the charts. Today’s action definitely hit the DX chart. On the hourly and 4-hour charts, it broke the bearish market structure. It means that we’ll probably see buyers as we hit the 93.80-94.20s green zone on the chart below. If recent history is any indication, the 95 level should also provide support. I think the edge is looking for opportunities at 95, 94.50s, and the green & red zones.

DX 4-hour

June 22 - USDX

As for the EUR/USD, it also broke the bullish market structure. After challenging the 1.14 handle 6 times, it could not sustain a move about it. What can’t go up, many times goes down…

Whether bullish or bearish, the key is to be smart about entries. If bullish, let it rally (assuming it does) and retrace to a reliable order block before buying. The red zone on the chart below (which also coincides with the broken trendline) will attract sellers. If with a long position, probably makes sense to cover there and look for a re-entry. If bearish, this is a good opportunity for an entry short.

June 22 - EURUSD

Cable has retraced and is back below 1.5813. I’m thinking that any move to 1.5800/13 and the sell zone will attract sellers again. I’m not bearish Cable per se, but after the ~800 pip move, it’s hard to find attractive buying opportunities at these levels. I think there’s plenty of 40-60 pip trades to be done on Cable.

June 22 - GBPUSD

To me, the most interesting moves today were on USD/CAD and the AUD/USD. On the Loonie, it did exactly what you would want if looking for more downside. It broke above the key resistance, cleared the stops, and quickly got back below the key level. It also got stopped right at the old order block. So far, this bodes well for my short GBP/CAD position and I like a short here in general.

And we can’t forget about WTI crude oil – it looks “ready”.

June 22 - USDCAD

Aussie also did a tremendous job today – it actually finished up for the day. After clearing stops and being held by the recent bullish order block, it’s now breaking structure to the upside. I would like to see .7840s.

(Disclaimer: I still have my long AUD/USD and short GBP/AUD positions)

June 22 - Aussie

Overall, I like the Australian Dollar and the Canadian Dollar. USD/JPY shorts at 123.90s (price as I type) is also quite appealing.

If you look at the chart below, the overall USD/JPY move today got held at the last bearish order block. The additional supporting item is that the 124 level held on the re-test of a 15-min bearish order block).

(Disclaimer: I also have a short position here from current levels).

June 22 - USDJPY

The key is to play smart, get good entries, control the risk.

If the EUR/USD gets to 1.08 overnight, call me maybe.


Charts and Trading ideas for Monday – June 22, 2015

Greek Calendar

Everything points to a rollercoaster week. Some will win, a lot will lose (usually how it works out in rollercoaster weeks). Let’s see if we can stay in the #winning side. Most of the data this week will be out of the US, so that’s something to keep in mind. We essentially have nothing out of Canada and the UK. Besides the HSBC China Manufacturing PMI, not much affecting the Australian Dollar either.

Will Greece default? I have no idea. Trading the Euro this week will not be optimal for the faint of heart. 30 pip stops? hahahaha. The rumor mill will be working so fast that I have to think the whips will takeout most people playing tight. However, did large specs close out all those shorts and build longs (and this is pre-FOMC) because they expected a Greek default followed by EUR/USD downside? That’s a lot of smart people betting on a Greek deal.

Alright, let’s start with EUR/USD. From a higher time frame, the charts look bullish. From the hourly perspective, this is what I see:


We may have a flag that points to the 1.1210 zone. Some traders I follow have been concerned that the FOMC spike did not clear stops below 1.1200. I share the concern and will keep an eye on this one. Any move to 1.1180/1.1210 and I’ll likely be looking to buy if it makes sense at the time. If we break the order block that capped last week’s advance to 1.1430s, I’ll likely go full-and-super-annoyingly-bullish Euro .

EUR/GBP has an interesting falling wedge. It’s also right at a “buy zone” and an order block. Assuming we get a Greek deal in time, this thing will likely fly. I really like this setup. If it starts to break, I may join this regardless (with the assumption that the market may be sniffing a deal).


EUR/NZD, EUR/AUD, and EUR/CAD – I see nothing interesting at the moment.

GBP/USD – Yes, the move has been parobolic-like, but it does not mean that we sell it. There’s nothing on the 4-hour chart below that says “sell me”. The data last week (positive inflation and a great average earnings index) also supports the upside move.

The 1.5813 level should act as descent support. If we break below it, only then will I consider short positions. For now, the optimal thing may be to buy at 1.5790/1.5813.

GBPUSD - 4H Chart

While I don’t like shorting GBP/USD, I have initiated another short on GBP/AUD (Friday’s position got nowhere). We’re at a sell zone here and the AUD/USD has some potential (which I’ll discuss further down). Additionally, assuming we get a deal in Greece, GBP may come under pressure due to the action on EUR/GBP.

Oh, maybe we’re in for a bullish bat pattern too (see second chart).

GBP/AUD 4 hour chart

GBPAUD - 4 Hour chart

June 20 - GBPAUD - Bulliish AUD

GBP/CAD – Nothing interesting yet, but I’m sleeping with one eye open and watching the upward sloping trendline. We have a swing high on the 4-hour chart – will the trendline and close-by order block break?

June 20 - GBPCAD - Trendline

GBP/JPY – We have a “spike and ledge” pattern. If 194.50 breaks (say hourly closes below it), we should be looking for a re-test of the order block + buy zone right below it.

June 20 - GBPJPY - Spike and ledge

AUD/USD – This went nowhere on Friday, but I still like the setup. I think we can revisit the .7800 handle again (there’s an inverse head and shoulders pattern on the 15-min timeframe which also points that way). We have China PMI data out Monday night (which is expected to be a little better than last time) and thus could help out the longs. Overall, I just think it’s pretty easy to define the risk here (and have a position)

AUD/USD Hourly ChartJune 20 - AUDUSD

USD/CAD – It needs to get above 1.2350 to change the current bearish bias. While Friday’s price action was not the best, we still have lower lows, lower highs, and a flag that point to 1.20. The pair also bounced where you think it would (i.e. a big buy zone).

June 20 - USDCAD

Overall – I continue to be bearish USD/JPY (need to see how the test of 121.50/122 plays out), USD/SEK (flag still in play), USD/MXN (downside bias remains).

The 93.30 on DX still looks like a bull trap.

Good luck!


Time is against the US Dollar

Let’s go back in time a bit. It’s March of 2015, how is the world doing?

  • European inflation is trending down. The ECB starts their quantitative easing program. The market expects the ECB to start hiking rates in 50+ months. ECB data is not that bad. Bunds are below 30-40bps and on its way to 4bps (with USD-Germany yield differential about to make new cycle lows too)
  • The Fed is expected to start raising rates in 2015. The preferred month by most economists and sell-side banks is June. If for some reason we skip in June, for sure pencil in September.
  • The US economy is not doing that well in Q1, but it’s “weather related”. The market accepts the narrative and prices in a better Q2. This means that the market shrugs off sub par data. At the end of the day, the market is looking forward and believing that Q2 will bring a brighter US economy
  • The US Dollar Index is reaching the 100 level and has had a major rally against a lot of currencies.

Now it’s June of 2015, how is the world doing now?

  • ECB inflation is no longer trending down. It’s trending up and actually surprising to the upside. The market now expects the ECB to hike in some 20-25 months. European data is still doing okay. Bunds are in the 70-80bps range and the US-Germany interest rate differential has decreased substantially relative to March.
  • The Fed did not raise in June. September? It has gone from “hell yes!” to “Hmmm, maybe I guess”. Overall Fed forecasts for interest rates have also decreased.
  • The US economy is doing better, but nothing gangbusters. The US dollar has sold-off on some recent good data points. Could it be that this pace of data is already priced in?
  • The US Dollar Index is at the 93 94 handle. When you consider some other currencies outside of the index, it has not retraced as much.

For reasons cited in recent past, I’m generally bearish the US Dollar. One proxy is that I’m looking for 90/91 on the US Dollar Index.

Some market participants see more upside in the US Dollar in the next 1-2 months. Somehow, we’re getting back to 100 in the /DX and above when a) the US dollar has already had a major rally; and b) the assessment of the US economy and Fed hikes has been reduced relative to the last time the Index was at 100. How to make the two connect?

I have seen some examples that try to cover this gap. Let’s take the recent note by Goldman Sachs and use the EUR/USD as our guinea pig. While Goldman Sachs’ rates team has pushed out their baseline scenario for a Fed rate hike from September to December, their FX team stands tall with their EUR/USD forecasts – .95 in 12 months and .80 by the end of 2017.

Their position is that the recent uptick in Euro inflation is temporary and that it will continue on its down trend. I’ve seen other people talk about this inflation matter and claim it’s the reason why the EUR/USD will continue its down trend from current levels. This is what I think about European inflation:


Why? I’m a complete clown when it comes to this. I’m no expert in inflation, especially not European inflation. I’m no PhD economist doing econometric models on the data point and dissecting the details, looking at correlations, analysing historical data, and trying to put all the pieces together.

Most people (including the Fed, the ECB, the BoE, and other major institutional bodies out there including banks) are actually semi-stumped by the recent global deflationary cycle. So I’m going to sit here and tell you where I think European inflation is going?

If anything, I prefer to believe what Goldman Sachs is saying. They’re a top investment bank and with a lot people spending 15 hours a day on such things. They also claim to do God’s work. At the end of the day, they probably have a better chace than me in getting the inflation equation right.

However, I’ll tell you what I do know. I know that European inflation has been ticking up. I know that the deflationary narrative is not as strong as it was 3 months ago. I do know that Goldman Sachs’ thing is a forecast – it may or may not be right. One is fact (inflation has bounced) and the other one is a baseline scenario in a world of probabilities.

This means that we have to wait until the next inflation reading (weeks to a month from now) to see any new data. What happens if we see another uptick in June, do we have to wait another 2 months to see if their thesis is right? How many months do I need to be sure that inflation has turned south again?

It’s unlikely (i.e. this is a probabilistic statement) that the market is just going to sit around and wait for negative inflation while the recent data has been the opposite. This is what I mean when I say that time is against the US Dollar.

The EUR/USD went from 1.38 to 1.05 and now stands at 1.12/13. Does it make sense to stick around to see if Goldman’s forecast pans out? What’s the risk/reward?

The Commitment of Traders is suggesting, as of now, that investors are not willing to stick around. They’re covering their short positions and opening longs (who would have thunk it?!). The EUR/USD daily also (still) looks quite bullish (higher highs, higher lows, rallying on good US data, etc).

Chart via Ashraf Laidi:EURUSD COT

With the price action pointing to a certain direction, the USD desperately needs stellar data out of the US and sub-par data out of Europe so the “monetary divergence” narrative can re-gain steam (remember, we’re at 1.13, not 1.32). If the EUR/USD breaks above the 1.15 handle, it will be another hint by Mr. Market.

Back in February/March, time was in the USD’s favor. It’s no longer the case. The way I see it – given that the USD has rallied 20-30% versus various currencies – it has now gone from “innocent until proven guilty” to “guilty until proven innocent”. Where are the goddamn rate hikes?

When you look outside the Euro, there are other appealing currencies to think about too. Is the Mexican central bank about to cut rates, is their economy steady, are they about to default on their debt? Food for thought.

Disclaimer: This is one of the frameworks that I’m currently using for my medium term view in the EUR/USD. It is not necessarily indicative of my bias for the week. I’ll be putting out a separate post with specific near-term setups that I’m looking at.