Macro Wrap – Euro Joins the Weaker vs. the Dollar Trend? $FXE

by Enis June 27, 2013 7:36 am • Commentary

There were slight rumblings yesterday from the ECB that it might be looking to pick up the easing baton from the Fed and the BoJ.  The Euro broke through the 50, 100, and 200 day ma’s all in the same day yesterday as those easing comments had an effect:

1 year daily chart of EUR/USD, 50 day ma in pink, 100 day ma in green, 200 day ma in black, Courtesy of Bloomberg
1 year daily chart of EUR/USD, 50 day ma in pink, 100 day ma in green, 200 day ma in black, Courtesy of Bloomberg

The 1.31 level now holds increased importance, as it is likely to act as resistance based on the confluence of ma’s there.

As for the ECB, they have a widely-watched meeting next week (interestingly, it falls on July 4th, when U.S. markets are closed).  Goldman Sachs Research wrote the following today:

Bottom Line:  We expect the ECB to leave policy rates on hold at its July 4 meeting. In the context of greater global market volatility, the ECB will be concerned about the upward drift in Euro short-term market rates, which is interfering with its desired monetary policy stance. At this stage, we expect Mr. Draghi to adopt more dovish forward-looking communication to contain that drift. The adoption of any formal Fed-style “thresholds” seems unlikely, especially as the shortcomings of such an approach are becoming more evident in the US context. More heavy-handed measures to steer the short end — an MRO rate cut, another VLTRO — cannot be ruled out. But they are more likely at subsequent meetings, should the “forward guidance” offered by Mr. Draghi fail to stabilise the money market curve at the lower rates the ECB desires, given the fragile — if stabilising — state of the Euro area real economy.

In short, Draghi is likely to continue his strategy of more talk, less action.  As for the Euro, I was surprised by the magnitude of its rally from mid-May to mid-June.  Long U.S. dollars in various ways (including this trade) is still my single largest speculative position at the moment, with a 3-6 month time frame.  While the Fed’s taper talk last week was the catalyst to give the dollar a short-term boost, I view the low rate differential between the U.S. and the rest of the world and a long-term shift out of emerging market assets as the ongoing backdrop that should drive more demand for dollars (full thoughts here).

In that context, the Euro has been the best performing major currency vs. the dollar this year.  Whatever the reason for that outperformance, yesterday’s technical break could be a sign that the Euro is about to join the “Weaker vs. the Dollar” trend.  Next week’s ECB meeting could give it the final push.