TIME TO SELL EUR/USD

"EUR/USD has been under pressure since the Fed’s tapering announcement on Wednesday and some
stronger sell signals have emerged that suggest the trend lower could extend.
  Fundamentally, we remain bearish on EUR/USD, and with only a handful of trading days left in 2013,
seasonal funding issues that have helped support the pair through November/December should be fading.
 Short term rate spreads, option market pricing, and the technical picture are all pointing lower, which means we may not see a better selling opportunity ahead of the New Year.

EUR/USD has seen some heavy trading in the aftermath of Wednesday’s Fed tapering announcement, and from a number of perspectives signals are flashing lower. Fundamentally, we have been bearish on EUR/USD for quite some time now, and the earlier start to Fed tapering only adds to that view. In the coming year, an ECB with flat or lower policy rates and that still threatens to add extraordinary stimulus should more clearly contrast a Federal Reserve that is reducing accommodative policies.
Through November and December we noted the seasonal funding issues that have tended to lift the pair into year-end over the past decade. With only a handful of trading days left in the
year though, that influence should be fading, and the high in EUR/USD may have already been set.
From a relative value perspective, a sharp move in short term German-US rate spreads in the USD’s favor suggests spot EUR/USD would be more consistent closer to 1.32 (upper chart to the right). Rate spreads have had a looser connection with spot EUR/USD over the past month or so, but a move of the
magnitude that we have seen since Wednesday is certainly worth noting (~5bps).
The options market also reveals investor concerns on the prospects for the bull trend that has built since November. EUR/USD risk reversals have shown a growing premium for protection against a downside move since Wednesday.
On the charts, the technical picture has also turned more bearish as we highlighted yesterday, which also suggests we have already seen the highs for the year.

Bottom line: We have been waiting for clearer topping signals for the past month in EUR/USD and the developments of the past few days may be as clear as it gets. We look to sell EUR/USD near the current spot rate in the upper 1.36 area, in a position that we think could have considerable downside legs in the weeks and months ahead."

FOMC Minutes at 19:00 GMT and what could be the outcome

Let the Federal Reserve debate end and see what they have to offer through its monetary policy announcement. Market had tried to focus and discuss on all issues related to jobs, growth, price stability, forward guidance, etc. Interestingly inflation, which is off target is the new topic and last hope that is being highlighted/focused by the Doves to come to their rescue, as they are well aware of the price of taper. 

Although I am not sure about the risks, as nothing has hindered the US economic activity. But the last word will come from FED that will matter. Whatever decision FED takes, market is now prepared for move that could be delayed by another 3-months if no announcement is made today. If announced, it is the size that would matter. 

The Maths is simple that if FED goes for taper then the size would initially play key role in moving the market. Though small size may not have sever immediate impact, but it ultimately it will lead to strong USD on believe that finally the move has occurred. No tapering would mean USD thrashing and boon for US Bond, EURO, GBP and Oil too could initially benefit, But Gold will take a big stride and could make $ 100-150 gain by year end. If FED give a future time period for tapering, initially USD may make tiny gain before market will start selling US Dollar and US Bond yield will tighten and Gold will glitter.

Meanwhile, prior to monetary policy announcement it is difficult to determine market direction, but lot will depend on the mood of market and hence, market will tilt accordingly. Ahead of policy announcement, German IFO will be released and some important announcement is due from UK too and ahead of FOMC decision US economic data's will be released.

Financial Market overview 2nd week Dec 2013

After impressive US Non-Farm Payroll data and Unemployment falling to 7 pct, there is certainly strong case to argue that FED should start tapering, as unemployment is only half-percentage away from 6 ½ pct target rate. Recent US economic performance goes in favor of US Central Bank’s bond purchase plan to reduce the amount.

It is evident that the labor participation is up averaging over 185.000 this year, earnings are up, and confidence in the economy has improved as consumers are looking confident. Earlier we saw sharp surge and upward revision of US GDP.

US mortgage rates are already hinting that the recovery has surely accelerated, though share market is showing unusual resilience and did not react to the tapering threat probably sensing that corporate profit will rise due to improving economic conditions. But do not be too optimistic about the share market growth as FED tapering also means withdrawal of cheap liquidity that should have adverse impact when implemented.

Friday’s reaction to the US jobs data was very unusual, as there was no positive re-action to the US unemployment data. Market chased trend by avoiding economic factor. US bond market is the best example, as 10-year bond yield after a brief surge, fell back to 2.86 pct. Allan Greenspan once warned that “when the bond market begins to move, FED might not be able to control it”.

In my view, we could soon be heading for a sharp move. What may have stopped US Dollar gain is the absence of FED official’s statement on the recent US economic pick-up. In recent past we have seen them defending tapering against jobs condition and growth, both have showed remarkable recovery.

The biggest challenge for US Central Bank is that it has to seriously consider start easing up its conventional and controversial stimulus program that is pumping USD 85 billion a month. Further delay will question FED’s credibility, as it has earlier in June declared that it may end up tapering by March 2014 based on fundamentals, which is as per projection, since unemployment has hit 7 pct and GDP is on the rise. Housing market continues to flourish.

Furthermore, all indications are that next month’s economic data will show better economic performance due to holiday season that should inflate demand. Therefore, there is no reason to further delay tapering. If FED is no rush and decides to continue its bond purchase program, then it should tell the market that why it is misguiding by deviating from its earlier (June) announcement when it is meeting its target and why is Fed unable to implement tapering. Low inflation was never its target and this could be a lame excuse.

It is very surprising that the Dovish FED officials have once again failed to read the US economic trend correctly and have been constantly trumpeting fearing economic slowdown and needs for more liquidity injection. So far estimates are FED has injected nearly USD 3 Trillion.

While, earlier on Thursday, the unexpected did not happen as ECB went for hold, but following monetary policy announcement in his press appearance ECB President Draghi answered with confidence, despite European Central Bank struggling for economic recovery and making poor future projection for the Euro-zone region.

Euro to my surprise did not weaken despite hint if slowdown in European and good economic recovery in USA. I still believe this could be false up move. If market believes that tapering and early rate hike is priced in then this is wishful thinking because once tapering is announced, no matter whatever may the size, market will become nervous and jittery. Remember this is not going to one time tapering, liquidity injection will gradually halt that has many strings attached. One hitch that may have hindered US Dollar’s rally could be the legislative factor that has deadline date for a Budget deal of December 13.

However, keep a close watch on emerging markets that should show signs of nervousness, as prior to any move its stock market will once again start melting and currencies will come under pressure and do not trust US bond market as holder of US treasuries could soon start losing its patience. More importantly, this time speeches from FED official should provide the real lead.