Seeking Alpha
Long/short equity, contrarian, currencies, hedge fund analyst
Profile| Send Message|
( followers)  

Last week's EUR/USD trade could be described as tense and volatile. After opening with a downside gap of more than 170 pips on Monday, the single currency tried to gain value through all the other days of the week. The daily SMA200 successfully played a resistance role to its rising efforts until Friday, when the euro managed to finish above the SMA200, at $1.298.

The main reason for this volatile performance was the uncertainty about Cyprus. Later on Sunday it was reported that a deal was finally achieved between Cyprus and the EU officials. According to a Reuters article, the plan, which does not need to be approved by the local Cyprus parliament this time, includes:

"winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank".

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalize Bank of Cyprus through a deposit/equity conversion."

The current plan does not impose a tax on depositors but rather places some of them in a bank default situation where they are faced with the possibility to lose all or some of their money. Same or even worse, are the perspectives before senior bondholders in Laiki bank, according to a statement of Jeroen Dijsselbloem, Chairman of Euro-zone finance ministers, cited by Reuters, in which he said:

"senior bond holders, along with the others, will be wiped out".

As of time of writing the euro trades around the $1.30 level, down from about $1.3040 where it went on the announcement of the Cyprus deal.

The Week Ahead

The most important risk events of the week are the Cyprus deal and Mr. Bernanke's speech on Monday, the U.S. durable goods and consumer confidence on Tuesday, and U.S. GDP on Thursday. Those have the potential to determine the near- to long-term direction of the EUR/USD exchange rate.

This week's analyst expectations are more pessimistic than they were a week earlier, with only about 40% of the expectations being for better-than-previous values. Consensuses are more optimistic for the U.S data (47%) than for the European one (31%). The weekly decrease in optimism is bigger for the European data (60%) compared to a decrease in optimism for the U.S. data (44%). This generally would favor the U.S. dollar against the euro.

The overly pessimistic mood among the analysts leaves some room for positive surprises which, if happen, would support the single currency as the beneficiary of the risk-on sentiment.

The current value of our Consensus Optimism Index (COI) is 40, down from about 80 for the previous week.

The index shows the proportion the positive consensus estimates take in all the estimates we have available for the respective week. A value above 50% represents an optimistic mood in the expectations rather than pessimistic. The weekly change in index's value could be used as a tool to assess the analysts' mood. It should not be neglected, however, that the EUR/USD rate actually moves rather on the real data and on how that data differs from the expected one.

Investors could take advantage of their own expectations about the EUR/USD exchange rate movement in order to hedge the positions they have in other assets. For instance, American investors with investments in euro denominated assets who expect that the U.S. dollar would appreciate against the single currency, could try to decrease the currency risk by selling euros or by opening a short position in an ETF which tracks the price of the euro. CurrencyShares Euro Trust (NYSEARCA:FXE) is among the most widespread options here. It tracks only the price of the euro measured in U.S. dollars. This ETF has an expense ratio of 0.40%.

For those who prefer more diversified funds, among the options are the PowerShares DB USD Bullish ETF (NYSEARCA:UUP) and the PowerShares DB USD Bearish ETF (NYSEARCA:UDN). Both funds are U.S. dollar denominated and track the value of the USD against six other major currencies - euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The funds' expense ratio is 0.50%.

Monday, March 25

Event

GMT Time

EST Time

Consensus

Previous

EU Cyprus Deal

N/A

N/A

USA Chicago Fed National Activity Index (Feb.)

12:30

7:30am

-0.32

USA Dallas Fed Manufacturing Index (Mar.)

14:30

9:30am

2.2

USA FED's Bernanke Speech

17:15

12:15pm

Monday presents two significant events - the Cyprus deal on restructuring the country's banking sector and the speech of Mr. Bernanke. While the deal was more or less expected and might be already calculated in the EUR/USD rate, the comments of Mr. Bernanke on the U.S. economy have the potential to become the risk event of the day.

Positive data on the other two examined indicators, Chicago Fed national activity index and Dallas Fed manufacturing index, would support the risk-on environment which would be euro positive.

Tuesday, March 26

Event

GMT Time

EST Time

Consensus

Previous

USA Durable Goods Orders (Feb.)

12:30

7:30am

2.5%

-5.2%

USA S&P/Case-Shiller Home Price Index (Jan.)

13:00

8:00am

7.4%

6.8%

USA Consumer Confidence (Mar.)

14:00

9:00am

70.3

69.6

USA New Home Sales (M-o-M) (Feb.)

14:00

9:00am

0.430M

0.437M

Durable goods orders in the U.S. is among the most important economic events of the week. Market expects an increase so any negative surprise would weigh on the single currency. The same effect, regarding negative surprises, is valid for the other three indicators.

Wednesday, March 27

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Gfk Consumer Confidence (Apr.)

07:00

2:00am

6.0

5.9

EU Business Climate (Mar.)

10:00

5:00am

-0.75

-0.73

EU Consumer Confidence (Mar.)

10:00

5:00am

-23.5

-23.6

EU Industrial Confidence (Mar.)

10:00

5:00am

-12.0

-11.2

USA Pending Home Sales (Y-o-Y) (Feb.)

14:00

9:00am

9.5%

Wednesday presents mostly European confidence data. The expectations are for slight improvements in all indicators except the business climate. Any significant deviations from the expectations, on both positive or negative side, would drive the rate of the euro in the direction of the surprises.

The data on U.S. pending home sales would add to the new home sales data from Tuesday and would enhance the picture of the U.S. housing market. A positive value here would support the notion of recovery. Hence, the single currency might appreciate.

Thursday, March 28

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Retail Sales (Y-o-Y) (Feb.)

07:00

2:00am

2.1%

2.4%

EU Germany Unemployment Change (Mar.)

08:55

3:55am

-1K

-3K

EU M3 Money Supply (Y-o-Y) (Feb.)

09:00

4:00am

3.5%

3.5%

EU Private Loans (Y-o-Y) (Feb.)

09:00

4:00am

-0.7%

-0.9%

USA Core Personal Consumption Expenditures (Q-o-Q) (Q4)

12:30

7:30am

0.9%

0.9%

USA GDP Annualized (Q4)

12:30

7:30am

0.4%

3.1%

USA Initial Jobless Claims

12:30

7:30am

340K

336K

USA Chicago Purchasing Managers Index (Mar.)

13:45

8:45am

56.2

56.8

Thursday presents interesting data. Germany retail sales are expected to show a decline, which would put some pressure on the euro. On the other hand, the consensus on Germany unemployment is that it will still decline but at a slower pace. A positive surprise here would be an acceleration of the decline in unemployment which will support the euro.

Private loans in Europe are important because they show the health of private credit sector. A surprising increase of the loans would be euro positive as it would imply investors possess a more optimistic view of the future.

The U.S data is expected to show a decline in the GDP. A positive surprise in the value would most probably lead to euro appreciation.

Friday, March 29

Event

GMT Time

EST Time

Consensus

Previous

USA Personal Income (Feb.)

12:30

7:30am

1.0%

-3.6%

USA Personal Spending (Feb.)

12:30

7:30am

0.6%

0.1%

USA Reuters/Michigan Consumer Sentiment Index (Mar.)

13:55

8:55am

73.2

77.6

Friday offers only U.S. economic data. The expectations for both personal income and personal consumption are positive and would support the euro. Negative surprises could increase the value of the U.S. dollar because of a renewed caution about the U.S. economic growth.

A positive surprise on the Reuters/Michigan consumer sentiment index might lead to euro appreciation.

Source: EUR/USD: The Week Ahead