Tuesday, February 15, 2011

EUR/USD - Short Trade Back In Play

The prevailing view on the street still seems to be that the USD is going to continue weakening to zero as the US tries to get a handle its debt situation. But fundamentally there are numerous reasons to be bullish, especially against the euro:
  1. Europe is still a mess. We're always just another crisis away from worrying about a euro collapse again. In June the market pushed EUR/USD under 1.1900 and everyone was talking about the euro being a failed experiment and that the cross was going to parity. In fact the market was so short EUR/USD that a lot of the move from 1.1900 to 1.4200 may simply be the result of the mother of all short squeezes.
  2. US interest rates are starting to rise. As interest rates rise, the gap between rates in the US vs. other countries narrows, bringing investment flows back into the US.
  3. The US economy is showing signs of strength. Strong economies generally = strong currencies.
  4. Notwithstanding recent strength in the US economy, equity markets worldwide are at risk of a pullback. The US stock market alone has rising 100% over the past 2 years. It is only a matter of time until we see a correction. Any sign of a hiccup in global stock markets would likely result in US safe haven buying - driving up demand for US dollar. 
  5. The European economies are still very fragile. Europe does not want, nor can they handle a strong currency at this stage in their cycle.
Technically, the chart also supports a long USD view:
  • The 100 day moving average (100dma) started to turn lower at the end of January. The last time the 100dma turned lower was on Dec 31, 2009. At that time EUR/USD was trading at 1.4322. It briefly went to 1.4579 by Jan 13 (13 days later) before falling to 1.1876 by June 6.
  • The daily charts appear to be creating a head and shoulders pattern. A clear break below the 1.3500 neckline should at a minimum target the 1.2900 Jan lows.
  • RSI is dipping under the 50 neutral zone and heading lower. This typically suggests that momentum is starting to build for a sustained move lower.

During the first 2 days of this week I've been accumulating a short position in EUR/USD via the EUO bear ETF (2x). My average price is 19.785 (which is right around 1.3500 in the cross).

I like the short EUR/USD trade, not only for the reasons above, but also as a hedge against long equity positions in my portfolio.

As discussed above, my initial target is 1.2900. A break above 1.3750 would make me reconsider my position.


  1. interesting post...what do you estimate the overall sentiment (bull/bear) to be?


  2. @Happy Landlord - It's tough to know for sure how traders are positioned, since so much of it is transacted OTC and not reported. But listening to commentary on CNBC it would appear that most are bearish USD. Even Larry Kudlow seems to have given up on the mighty "King Dollar". But clearly the market is no long bullish USD as it was in the summer...