Euro Moves Could Signal Increasing Dollar Stability

There is much talk in the markets about a double-no-touch structure between $1.48 and $1.51. However, more immediately we think the $1.4880 area is a key pivot. A move above $1.4880 would take neutralize the downside pressure on the euro and point to a retest on the $1.4960-$1.5000 that has capped upticks over the past few sessions.

In conversations with clients, two things continue to be noteworthy. First is the extent of the negative dollar sentiment. The dollar bears are numerous and with the dollar falling since the start of Q2, it continues to seem to be a crowded trade.

Second, the market is nervous. It has not embraced the euro in its own right, but rather has moved toward the euro because it is not the dollar and is the liquid alternative. The nervousness of the long euro holders is evident in the options market where the premium being paid for euro puts over euro calls (equidistant from the forward strike) reached a new high for the year Friday at 1.19%. In contrast, in early June when the euro was just getting above the $1.40 level, the market was paying a similar premium but for euro calls not puts.

Interest rate differentials continue to move against the US. This week alone the 2-year note spread moved almost 25 bp in Germany's favor over the US. The June 2010 Euribor-Eurodollar spread is making new highs (in Europe's favor) today. This is not the stuff that is usually associated with a dollar bottom.

On the other hand, the technical condition points to the vulnerability of the euro (and other foreign currencies by extension). More talk of a double dip in the main economies, disappointing economic data, some increased concerns about the financial fragility are serving to slow the risk-on trades and give the dollar a sense of stability.

Disclosure: No positions

Comments

[Liz]

What does this have to do with the topic?


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2009 Nov 20 02:52 PM

[adan]

marc, would you consider what happened this past week in the ukraine, with their dollar debts, a tiny taste of what "could" go wrong with being too short the dollar?

there's lots of articles, this is just one:
www.businessspectator....

thanks!

2009 Nov 21 07:47 AM

[Moon Kil Woong]

Indeed, the world is embracing the Euro mainly because of the mismanagement of the Federal Reserve. Euro fundamentals are not very healthy either, but their commitment to reverse out of QE is honorable and economically sound. That coupled by the fact they are pulling out of a recession faster than the US spells better fundamentals than the US$.

2009 Nov 21 11:05 AM

[David White]

Certainly the German, French, and Eurozone Q3 GDP's were all misses. In contrast the US Q3 GDP did well. I would tend to question whether the Eurozone is coming out of a recession faster than the US. It does not at first glance seem so. If in fact the Euro rallies over the USD as this article suggests, it could be the worst thing for the Eurozone recovery. Such a rally would likely make US products even more competitive at a time when European businesses are already struggling. The ECB is maintaining a 1% interest rate vs the Fed's 0%. This would tend to keep the Euro stronger. But would it keep moving the Euro upward after an already extended move upward?

Prechter has been predicting a move up in the USD Index based on extremely low positive sentiment (< 3%). Eventually this may come to pass.

2009 Nov 22 03:33 AM