Buy Euros - Eurozone Looks Stronger Than Before

by: Max Loh

In the FX world, King USD has staged a mini revival across the board on back of rising Treasury yields.

The opportunity lies in buying EUR against the USD, with the currency pair languishing about 7% below its recent high of 1.25.

Positive talks between Merkel and her party's coalition partner have supported the EUR, and even Greece's economy is stronger than before.

In the FX world of late, commodity currencies have been hit spectacularly, with AUD, NZD and CAD the weakest amongst the majors. A large contributing factor - which should have been well documented by now - is the mini revival of King Dollar. The Dollar Index has sprinted up close to 7% from the 2018 lows and now sits above 94 levels.

The move in the USD and weakness in the commodity currencies might have coincided with the markets finally awakening to the reality of possibly four rate hikes per year, coupled with US Treasury yields providing increasingly attractive returns, so much so that aforementioned yields are now higher than that of the "carry" commodity currencies. Sooner or later, the USD should be termed the "carry" currency amongst the G10 cohort.

As we approach the summer lull, where FX markets are typically quiet, the opportunities lie in accumulating some currencies that have fallen in the wake of King Dollar's fury - and I think the Euro currently provides the most value at the current levels of 1.17.

For starters, the Eurozone is arguably the second most resilient economy in the developed world, after the US, so much so that the European Central Bank (ECB) is on course to taper after the Federal Reserve. The ECB has set its sights on ending its Quantitative Easing program by year-end. Though it has said it would not consider raising rates till summer of 2019, the plans are there, and that is a strong testament to the recovery of the Eurozone.

EURUSD has reached highs of close to 1.25, before being slammed down by a strong USD to recent lows of 1.15. At 1.17, buying Euros against the USD allows the investor to gain at least 7% should the currency pair recover to test the previous highs.

One catalyst for the Euro's ascent would be positive talks between Merkel and her party's coalition partner in recent immigration talks. The markets have been worried that failure in the talks could lead to turmoil in the Eurozone, but both parties have managed to reach a consensus of late.

Also, it seems even Greece has recovered from its economic doldrums, with sentiment improving on back of Eurozone leaders gifting Greece a debt repayment extension in the June meeting. Greece will exit its economic bailout program officially on August 20, and the future looks brighter than before.

Lastly, recent trade tensions between the US and China have led to equity weakness. Sooner or later, the markets might start pricing in the possibility of the Federal Reserve taking a more conservative rate hike trajectory should trade tensions continue, due to the uncertain geopolitical environment. That might lead to a softening USD and a stronger EURUSD.

Source: NetDania, 5 July, 2018

Disclosure: I/we 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.