"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.
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.
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."
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