Based on the financial crisis in Europe, we wrote an article about a euro shorting opportunity, "Sell the euro on spikes." On Friday, the euro (FXE) reached recent highs above $1.28. This is clearly a spike. However, the euro may be in for a short-term rally, so traders should wait until the momentum subsides before shorting. It seems the spike is not over.
There are several technical and fundamental factors indicating a short-term rally in the euro.
No matter how you draw the resistance line, Friday's move was clearly a breakout of resistance the euro had trouble piercing. The above is a daily chart of EUR/USD. A combination of short covering and widespread buying caused the euro to spike up Friday, and continue even late into the session with a false reversal:
The above is an hourly chart, you can see in the last 4 hours of trading, the euro had kept going up. This is indicative of a positive open Sunday and a potential continued short-term rally. Normally after such a move, there is a retracement at least for a short while until the move continues. But Friday, the retracement only lasted for around 2 hours (or 2 bars on above chart)
The second important technical factor was the move of EUR/CHF away from the peg. See the below chart of EUR/CHF:
This hourly chart shows how the pair was nearly not tradeable at the 1.2000 peg. The SNB has made no official statement, but rumor has it that the peg will be moved to 1.22 area. It also follows a May to September pattern the SNB seems to have regarding pegs and SNB action. It was in September 2011 that the SNB intervened in the CHF.
The CHF is an important factor in looking at euro flows: Before the peg, the CHF was an easy alternative currency to the euro for rich investors and large funds, which fueled the CHF rise last year. Since the peg, while money is still likely flowing into Switzerland, it is not reflected in the EUR/CHF cross. This move is thought to be caused by rumor and speculators; not real money flows. Now with EUR/CHF activity, this is an additional indicator to watch for future trading opportunities and indication in the rate of EUR/USD.
Draghi 'rescued the euro' by announcing the Outright Monetary Transactions scheme. But we must note that he didn't buy any bonds; effectively nothing changed fundamentally or economically. This rally is based on market perception; which indicates it will continue for the short-term.
The upward rally in the euro and URR against all other currencies will likely continue for the short term but is not sustainable. Picking a top here is hard, but watch the key $1.30 resistance (a both technically and psychologically significant) level. When the buying subsides, this will provide a great short opportunity for the euro.
Disclaimer: The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.