I last wrote about the euro (NYSEARCA:FXE) in the wake of January unemployment and inflation numbers that triggered a sharp sell-off. I took the opportunity to lock in profits on my short EUR/USD position. A good thing. That point turned out to be a bottom with EUR/USD grinding ever higher ever since.
One month after that point, eurostat reported the exact same inflation reading - "Euro area annual inflation is expected to be 0.8% in February 2014, stable compared with January, according to a flash estimate from Eurostat, the statistical office of the European Union" - and the exact same unemployment data:
"The euro area (EA18) seasonally-adjusted unemployment rate was 12.0% in January, 2014, stable since October 2013. It was also 12.0% in January 2013. The EU28 unemployment rate was 10.8% in January 2014, stable since October 2013 It was 11.0% in January 2013."
Yet the reaction in forex markets was exactly opposite the reaction at the end of January. This time, the euro soared, even with the growing crisis in Ukraine. Along with the changed reaction, the narrative changed: instead of expecting the European Central Bank (ECB) to ramp up its fight against disinflation, now apparently the ECB suddenly has time to wait and see. It is definitely a convenient way to create a story that fits the trading action. To me, the euro still seems too high for the economic reality on the ground, so I remain bearish.
Notice from the chart below that momentum has in fact changed. Going into the January numbers, the euro had been subtly weakening for about six weeks. The euro was rallying into the February numbers. Next up is this week's ECB rate decision to determine, potentially, whether this rally continues. As the chart shows below, a rate cut is far from a guarantee of a weakened euro.
The resilient euro is back to levels that formed a presumed double-top last year.
I remain bearish on the euro and have used these higher levels to rescale into a fresh short position. One of the interesting developments alongside the euro's growing strength is the accelerating strength of the Swiss franc (NYSEARCA:FXF), a move I am fading as well. The stronger the euro gets, the stronger the franc gets - exactly the opposite I would have expected: since the financial crisis, strength in the franc has been explained by a desire to avoid (or hedge against?) euro risk. The strength in the euro should be greeted by relief in the franc, but such is not the case. (I posed this question to Marc Chandler - he responded by saying under normal conditions, the illiquid market in the franc treats the currency like the euro on steroids).
The euro is resilient, but the franc is getting even stronger…
Source for charts: FreeStockCharts.com
Note how EUR/CHF is within "shouting distance" of the 1.20 floor. I fully expect the Swiss National Bank (SNB) to get a little louder than usual about its resolve to defend that level. Forex traders should watch these developments just as closely as the stubborn resilience of the euro.
Additional disclosure: In forex, I am net short the euro and the franc.