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During the last week the euro lost about a half percent of its value against the U.S. dollar and finished at $1.2955 on Friday. Such a downward movement was among the expected outcomes, as noted in the last edition of our EUR/USD "week ahead" review.

The euro started the current week with a decline to the $1.289 level but quickly covered the loss. As of the time of writing the single currency trades in the $1.2940-60 area. As the following daily graph shows, the EUR/USD rate is still above its SMA200 so the current uptrend seems intact.

EURUSD Daily Graph Suport Line
(Click to enlarge)

We see that the EUR/USD value continues to oscillate around the $1.289 area, which is a 23.6% Fibonacci retracement level of the $1.2040 - $1.3160 movement. The SMA200 provided a support line at the beginning of October, as expected. What could be forming here from a technical point of view is a symmetrical triangle (shown by the blue lines), which in general serves as a continuation pattern when seen inside a strong trend. Such a trend seems to be present on the graph and a breakout of the triangle on the upside could signal that a further long term appreciation of the euro against the U.S. dollar would be underway.

The Week Ahead

The consensus for most of the U.S. economic data is that the new values will be relatively better than the previous ones, so this would add fuel to the current risk-on environment. Any signs from Europe's officials on more decisive actions to contain the crisis and support growth on the continent would also support the euro.

The possible changes in the EUR/USD exchange rate could be played by investors through a position in the CurrencyShares Euro Trust (FXE). It tracks only the euro currency rate measured in U.S. dollars. The fund has an expense ratio of 0.40%. Depending on one's expectations about the direction of the change in the EUR/USD price a respective long or a short position could be used.

Investors who would not prefer to track the value of the U.S. dollar against a single currency but instead to measure it against a basket of currencies could use the PowerShares DB USD Bullish ETF (UUP) or the PowerShares DB USD Bearish ETF (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%.

Those investors who do not want to engage directly in the currency markets but have a currency exposure could search for alternatives whose prices often move inversely to the price of the U.S. dollar. A possible candidate here would be the SPDR Gold Trust (GLD). As of the end of September 2012, the monthly correlation for the last one year between GLD and UUP stands at -0.75. GLD could be used as way of hedging a U.S. dollar exposure. The negative correlation suggests that those expecting the U.S. dollar to decline in a near- to long-term horizon could use a long position in the ETF. This fund tracks the spot price of gold and holds physical gold bullion. It has an expense ratio of .40%.

The correlation between the U.S. dollar, or the DB USD Bullish fund in this particular case, and GLD should be periodically evaluated because a change to a lower value is possible. Such a change would be justified by a shift in fundamental factors like supply and demand for gold or a diversification of capital flows to other asset classes. Any lowering of the correlation would lower the effectiveness of the hedge and prompt for further actions from the investors.

Monday, Oct. 15

Event

GMT Time

EST Time

Consensus

Previous

USA NY Empire State Manufacturing Index (Oct)

12:30

7:30am

-4.5

-10.41

USA Retail Sales (Sept)

12:30

7:30am

0.8%

0.9%

USA Business Inventories (Aug)

14:00

9:00am

0.5%

0.8%

Monday is relatively calm concerning the economic events. Apart from the NY Empire manufacturing index, the market expects the other two indicators to deteriorate a bit. Any positive surprises on those could initially drive the value of the USD up. However, at a later stage this could increase the risk taking sentiment of the market participants as it would be perceived as a sign of improvement of the U.S. economy. The result would be an appreciation of the euro against the U.S. dollar.

Tuesday, Oct. 16

Event

GMT Time

EST Time

Consensus

Previous

EU Consumer Price Index (Sept)

9:00

4:00am

2.6%

2.6%

EU Trade Balance (Aug)

9:00

4:00am

€8.4B

€7.9B

Germany ZEW Survey Economic Sentiment (Oct)

9:00

4:00am

-15.5

-18.2

USA Consumer Price Index (Sept)

12:30

7:30am

1.9%

1.7%

USA Redbook Index m-o-m (Oct. 7)

12:55

7:55am

-1.7%

USA Net Long-Term TIC Flows (Aug)

13:00

8:00am

$45.3B

$67B

USA Industrial Production, m-o-m (Sept)

13:15

8:15am

0.2%

-1.2%

USA Capacity Utilization (Sept)

13:15

8:15am

78.3%

78.2%

NAHB Housing Market Index (Oct)

14:00

9:00am

41

40

Tuesday is going to deliver a lot of economic data, much of which is of a higher importance.

It starts with the CPI index in Europe, which is expected to show no significant change from its previous value. A reading higher than the consensus one would support the euro as it would increase the chances for a more restrictive policy on behalf of the ECB.

An increase of the EU trade balance would show the positive role the depreciation of the euro has on the Europe economy. Given the current uptrend in the EUR/USD rate a decrease in the EU trade surplus is to be expected in the following periods. However, if the EU trade balance continues to improve despite the more expensive euro relative to the U.S. dollar, this could mean that a structural change is happening in the competitiveness of the European exporters. Any negative surprise here would weight on the euro.

The ZEW sentiment is also an important indicator of future economic developments in Europe. A positive surprise would show the investors are increasingly optimistic towards the next six months. This would further support the euro.

The U.S. CPI is expected to show a slight increase which would narrow the inflation differential between Europe and the U.S. This would support the U.S. dollar against the euro.

The changes in the Redbook index together with the U.S. industrial production, capacity utilization and housing index would show the direction in which the retail sales, manufacturing and housing markets are going. A higher than the previous values in all indicators would signal an improvement of the overall sentiment which would decrease the risk aversion in the markets and further fuel the euro appreciation. The thing that could break the euro uptrend in the current environment of low interest rates and the Fed's vows to keep them unchanged through 2015 would be a significant increase of the U.S. inflation (possibly above 3% as indicated in a Reuters article about the FED minutes). At the moment such an increase is not seen.

Wednesday, Oct. 17

Event

GMT Time

EST Time

Consensus

Previous

EU Construction Output, m-o-m (Aug)

9:00

4:00am

-0.3%

USA Mortgage Applications (Oct 12)

11:00

6:00am

-1.2%

USA Housing Starts (Sept)

12:30

7:30am

0.77M

0.75M

USA Building Permits (Sept)

12:30

7:30am

0.81M

0.803M

The European construction data will show the condition of the sector which was among the worst performers in the current crisis. An increase in the output would mean bigger inflows of capital into construction could be expected. This would be supportive to the euro.

The rest of the events concern the U.S. housing data. Lower values than the previous ones would indicate a deterioration of the housing market which could weight on the current risk taking sentiment. As a result the euro could lose some of its value against the USD.

Thursday, Oct. 18

Event

GMT Time

EST Time

Consensus

Previous

EU ECB Meeting

N/A

N/A

EU European Council Meeting

15:45

10:45am

USA Initial Jobless Claims

12:30

7:30am

339K

USA Leading Indicator (Sept)

14:00

9:00am

0.1%

-0.1%

USA Philadelphia FED Manufacturing Survey (Oct)

14:00

9:00am

0.2

-1.9

Thursday presents two important events in Europe - the ECB governing council meeting and the European council meeting. The later one continues in Friday also. The elevated inflation data and subdued growth perspectives in Europe could affect the ECB's decision on its monetary policy although significant changes are not expected.

The European council meeting will discuss the progress made on the European banking supervision, among other economic topics. The single banking supervision is among the key issues the effectiveness of the Europe's permanent bailout fund - the European Stability Mechanism, depends on.

In the U.S. the jobless claims will be expected with interest. After the surprising decline last week the current data will show if there is a continuation of the improvement in the job market. An increase in the data will lower the risk taking attitude of the market which would weight on the euro.

The consensus is that the other U.S. indicators presented above will show an improvement also. A negative surprise on those would weight on the euro and support the USD in the current risk-on environment.

Friday, Oct. 19

Event

GMT Time

EST Time

Consensus

Previous

EU Economic Council Meeting

8:00

3:00am

Germany Producer Price Index (Sept)

6:00

1:00am

1.6%

EU Current Account s.a. (Aug)

8:00

3:00am

€9.7B

USA Existing Homes Sales Change (Sept)

14:00

9:00am

7.8%

On Friday the Economic council meeting continues. At the end a press conference will be held which could reveal if any significant new measures are to be expected concerning the sovereign debt crisis in Europe. Given this an elevated volatility in the EUR/USD pair could not be ruled out.

A value above the previous one on the Germany's PPI could fuel the inflationary expectations and will be a supportive factor for the appreciation of the euro.

A continuation of the uptrend in the EU current account will support the euro whereas a decline below €9.7B would put some weight on the single currency's rise against the U.S. dollar.

The change in the existing homes sales in the U.S. will show the direction of the U.S. housing market. A value above the last one would support the euro as this would mean the improvement continues so the capital flows into the safe haven currencies like the USD will continue to decline.

Source: EUR/USD: The Week Ahead