Intraday Market Thoughts

Euro Faces Hardened Test

by Adam Button
Jul 24, 2017 12:43

European indices are selling off again, not only due to the prospects of invevitable QE tapering from the ECB, but also due to ongoing declines Europe's auto sector due to allegations of price collusion.  Daimler-Benz and BMW are down 15% and 11% year-to-date. On Friday, the Premium Insights locked in 345-pt gain in the Dax short trade opened on Monday. A new note had been issued to indicate the next step (when & where). 

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Euro Faces Hardened Test - Eurostoxx Auto Sector Monthly (Chart 1)

The euro surged last week and is now less than 50 pips from the August 2015 high. The Swiss franc narrowly beat the euro last week as the top performer while the pound lagged. CFTC positioning showed increasingly-crowded bets against the yen. The euro has been skidding along the lows for more than two years but is now threatening to break out. Large gains in three of the past four weeks has EUR/USD bumping up against 1.1714 and a break would be a foray into the massive void formed by the drop to 1.05 from 1.40 that started in 2014. Here's Ashraf's January piece (when parity forecasts were FX traders' favourite past-time) asserting not only EURUSD would not reach parity, but will hit $1.10.

The latest leg of gains comes as the US dollar struggles economically and politically. The non-stop drama and gridlock in Washington increasingly threaten another round of risk aversion.

Inertia should keep a bid in the euro early in the week but the calendar picks up midweek with the FOMC, some higher-tier US data and German CPI on Friday.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +91K vs +84K prior GBP -16K vs -24K prior JPY -127K vs -112K prior CHF -4K vs 0K prior CAD +8K vs -9K prior AUD +51K vs +37K prior NZD +36K vs +32K prior

The yen trade is beginning to look saturated, especially when you factor in the carry trade. The positioning is the kind of thing you might see before a squeeze on risk trades.

The Canadian dollar finally flipped to a net long position. That means the squeeze on the shorts is done but there is still plenty of ammunition if longs want to get involved. In AUD and NZD, meanwhile, the trade is starting to get crowded.


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