Tuesday, February 11, 2014

Watch the trendline (EURUSD)

The pair broke out of the channel displayed in the previous post. I'm still sitting short with my stop untouched at 1.371. I will be watching very closely whether we will break the trend line into the channel again or bounce from the trend line and find support. Depending on the outcome I will do one of the following.

If we were to enter the channel again I would consider this move as a head fake which would mean that we are looking much lower than the bottom of the channel, probably aiming for sub 1.33 and I will stay short until I find a proper target.

If we were to bounce on the trend line and enter the 1.368 area again I would have to suck it up and cover my short since It is likely that we target the long term monthly trend line above 1.38 which would be my next place to short.

Since I'm fundamentally negative towards EUR I will not long this pair for a longer hold. Here's the chart again with direction line pointing down which was posted earlier.

Monday, February 10, 2014

Tastes like short covering (euros)

Futures positioning data (http://www.cftc.gov/dea/futures/deacmesf.htm) revealed that non-commercial positioning changed during the week before 4th of February from net long 14k contracts to net short 13k contracts. This means that a lot of shorts were established in the range of 1.35-1.355. I bet the next futures positioning data on Friday reveals that a lot of those shorts were covered after ECB kept rates on hold. This would mean that the current rally is built on short covering, especially if you look at declining industrial output today in Italy and France while EURUSD is making new highs. I'm shorting this pair on the basis that this rally is mostly short covering, the outlook for the Eurozone is still glim and technical picture looks like there might be a reversal any moment now. Check the chart below for the trade. I have established my shorts with a 1.34 target and stop above 1.37.

Friday, February 7, 2014

The secret strategy of ECB

It was rather surprising that the ECB didn't sound as dovish as was expected due to the recent underperformance of inflation in the Eurozone. Mario Draghi pointed out that the situation is complicated and that the Eurozone is not threatened by deflation. I personally beg to differ but the actual question is why did the ECB decide against dovish rhetoric? They had to know that the euro would strengthen if they didn't sound dovish. They also know that weaker euro would support the economy of the Eurozone. This leads me to think that in ECB's mind there are much bigger threats currently out there than the threat of deflation. Another possibility is that dovish rhetoric might suggest a dim outlook for the Eurozone which would increase periphery rates again which would eventually lead to activation of OMT and a bigger mess than we are in currently economically. Whatever the reasoning might be I'm confident that Draghi has currently everything under control and they do have other measures available to hold the euro under control (reserves management of NCB-s for example).

This leads me to believe that the euro will be well supported right now and will be much more influenced by the dollar near term. I also believe that the possible upside in the euro is limited and I'm building my shorts in the area of 1.363-1.365.