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As expected in the previous edition of our EUR/USD: The Week Ahead review, during the last week the euro surpassed the $1.37 barrier and appreciated to a bit above $1.38. It reached $1.3811 on Wednesday. After that it lost strength and closed the week near $1.373. This marked an increase for the week of 0.22%. The euro has appreciated for the last five weeks, the longest series of weekly increases since the beginning of August.

Technically speaking, the euro still has its uptrend. There are signs of possible dangers but they seem rather unsure at the moment. Market expectations for the week are mostly connected with the expected FED's tapering decision on Wednesday. In the surprising case there is no tapering announced, the single currency could lose its value in short- to near-term because this would be a sign that the FED does not see the U.S. (or the world's) economy as improving as the market hopes. In case of tapering we expect a short term volatile appreciation of the USD which to be followed by a near- to long-term appreciation of the euro.

The Week Ahead

After the relatively clam previous week, we now may have a 'make it or break it' week regarding the economic events. The important risk events start on Monday with the speech of Mr. Draghi, the President of the ECB. The events continue on Tuesday with the inflation data for both Europe and the U.S. Wednesday is the day that is most expected from the market and could present the highest level of risk because of the expected FED's interest rate decision and monetary policy statement. Then on Friday we have the U.S. GDP (Q3). Those economic events have the potential to determine the near term direction of the EUR/USD pair.

This week's analysts optimistic expectations (71%) are again higher than previous week. This week consensuses are more optimistic for the U.S. data (72%) than for the European one (69%). The positive economic expectations for the U.S. increase by almost 117% while those for Europe decline by 15%.

If there happen no or relatively small amount of negative surprises regarding the U.S. data, the danger of tapering liquidity would continue to be expected to come from the U.S. rather than from Europe. If that tapering happens on Wednesday, it could give temporary short- to near-term relative strength of the USD against the euro. We should not forget however, that the stronger euro, which is a risk-on currency, is generally associated with a better development of the economies. In case that the growth continues on both sides of the ocean, in long-term the euro could appreciate even further.

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%.

Another option is to use the Barclays iPath EUR/USD exchange rate ETN (NYSEARCA:ERO). It is an ETN with an expense ratio of 0.40%. Its only holding is euro. Investors who believe the USD will continue to appreciate could take advantage of a short position in the ETN, and vise versa. Like all ETNs, ERO has some differences in taxation in different jurisdictions compared to an ETF. Readers are encouraged to consult a tax professional.

Those who are not feeling comfortable with or are not allowed to take short positions but still expect the euro to depreciate, could utilize a long position in the ProShares Euro Short ETF (NYSEARCA:EUFX). It tracks the inverse of the U.S. dollar price of the euro. This ETF is a commodity pool and as such has a slightly higher expense ratio (0.95%).

Monday, December 16

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Markit Manufacturing PMI (Dec.) p.

8:28

3:28

53.0

52.7

EU Markit Composite PMI (Dec.) p.

8:58

3:58am

51.9

51.7

USA Nonfarm Productivity (Q3)

13:30

8:30am

2.2%

1.8%

USA Markit Manufacturing PMI (Dec.) p.

13:58

8:58am

55

54.7

EU ECB President Draghi Speech

14:00

9:00am

  

USA Industrial Production (Nov.)

14:15

9:15am

0.4%

0.1%

All of the data on Monday is expected to present better-than-previous values. Negative surprises from European side could weigh on the euro. The speech of Mr. Draghi is the most interesting event for the day. Our expectations are that he could continue to be not so dovish as the markets hope which will send the euro higher at least temporarily. In a long term he could reiterate his position that the single currency is a strong one and there should be a stronger political will to resolve the economic crisis on the continent. Basically the ECB would be on hold regarding its monetary policy.

Tuesday, December 17

Event

GMT Time

EST Time

Consensus

Previous

EU CPI Core (Nov.)

10:00

5:00am

1.0%

0.8%

EU CPI (Nov.)

10:00

5:00am

0.9%

0.7%

EU Germany ZEW Economic Sentiment (Dec.)

10:00

5:00am

55.0

54.6

USA CPI (Nov.)

13:30

8:30am

1.3%

1.0%

USA CPI Core (Nov.)

13:30

8:30am

1.7%

1.7%

USA NAHB Housing Index (Dec.)

15:00

10:00am

55

54

The expected EU inflation data on Tuesday is far from the ECB's threshold so it is not expected to place an imminent burden on the ECB to tighten its monetary policy. The U.S. inflation data is somewhat more worrisome because of the CPI core data. If the energy and food prices have not had their lowering effect on the inflation, the overall U.S. CPI would have been much closer to the 2% threshold of FED. Generally, all other things equal higher commodities prices are correlated with a lower USD so if there are not some general changes in this interrelation (like the increasing extraction of shell gas, etc.), we could expect that in an environment of a lower USD commodities prices would catch up with their increasing effect on the U.S. inflation.

Wednesday, December 18

Event

GMT Time

EST Time

Consensus

Previous

EU Germany IFO Business Climate (Dec.)

09:00

4:00am

 

109.3

USA MBA Mortgage Applications (Dec. 13)

12:00

7:00am

 

1.0%

USA Housing Starts (Nov.)

13:00

8:00am

0.950M

0.891M

USA FED's interest Rate Decision

19:00

2:00pm

0.25%

0.25%

USA FED Pace of MBS Purchase Program

19:00

2:00pm

 

$40B

USA FED Pace of Treasury Purchase Program

19:00

2:00pm

 

$45B

USA FOMC Economic Projections

19:00

2:00pm

  

USA FED's Press Conference

19:30

2:30pm

  

Wednesday seems to be the higher event risk day of the week. Markets expect that FED will start some form of tapering while using stronger wording to anchor the long term yields expectations. Nevertheless, the tapering could have its effect on the EUR/USD currency rate in the form of USD appreciation, albeit in a short term. Players could expect an increased volatility around the time of the announcements.

Thursday, December 19

Event

GMT Time

EST Time

Consensus

Previous

USA Jobless Claims

13:30

8:30am

 

368K

USA CB Leading Indicator (Nov.)

15:00

10:00am

0.6%

0.2%

USA Philadelphia FED Manufacturing Survey (Nov.)

15:00

10:00am

10.0

6.5

After the "make it or break it" Wednesday, Thursday comes with a lot smaller amount of economic events. A higher-than-previous value of the U.S. jobless claims would be euro positive, while a decrease in the claims could lead to USD appreciation. The other two indicators, if their values are in line with the expectations, could be euro supportive.

Friday, December 20

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Gfk Consumer Confidence (Jan.)

07:00

2:00am

 

7.4

USA GDP (Q3)

13:30

8:30am

 

2.5%

USA GDP Price Index (Q3)

13:30

8:30am

 

0.6%

EU Consumer Confidence (Dec.) p.

15:00

10:00am

-15.0

15.4

The data on the U.S. GDP price index would give markets hints about the inflationary expectations in the American economy. Significantly higher value could be USD supportive.

A positive surprise on the European consumer confidence would support the single currency.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.