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FXE: Short Squeeze In Euro Is Just Getting Started

Mar. 09, 2020 7:56 AM ETEUO, FXF, FXY, ULE, UUP, FXE1 Comment


  • Euro enjoyed solid back-to-back weekly gains vs. the U.S. dollar on the heels of free-falling Treasury yields.
  • EUR/USD jumped above its 50-week moving average for the first time in more than 90 weeks, which historically is a long-term bullish signal.
  • Further short covering rallies are probable on elevated net short positioning by large speculators in euro futures.
  • A long-term bull run is in the making for the euro based on technicals and further convergence in bond yields between U.S. and Europe.

Once thought to be immune against the global coronavirus outbreak, the U.S. dollar (UUP) strength came to an abrupt halt as the euro (FXE), Swiss franc (FXF) and yen (FXY) snapped back viciously against the USD off recent lows. Nosediving Treasury yields on bout of risk aversion and Fed's emergency rate cut certainly contributed to the beatdown in U.S. dollar, as the spread between 10-year Treasury and German Bund yields narrowed to 2016 levels:

Source: U.S. Department of Treasury, WingCapital Investments

Not even the much stronger than expected non-farms payroll number was able to stop the slide in U.S. dollar and bond yields, as 10-year Treasury closed solidly under 1% to end the week. Consequently, EUR/USD jumped for 2 straight weeks totaling 4% and above its 50-week moving average for the first time in more than 90 weeks:

Source: WingCapital Investments

The latter observation could prove to be a turning point for the euro, as there were only 3 other times in the past 3 decades when EUR/USD closed above its 50-week moving average for the first time after being under more than 70 consecutive weeks:

Source: WingCapital Investments

Empirically, we observe that during all of those instances, the euro was in the process of building a major bottom vs. the USD. While lows were tested multiples times during 2000 and 2016, a more sustained uptrend with 10+% gains ensued thereafter in both cases. Numerically, below shows the forward returns in EUR/USD in various time frames:


Previous Streak Under 50WMA

Forward Chg 4-Weeks 12-Weeks 6 Months 1 Year 2 Years
3/20/1994 1.1545 -74 -0.98% 3.31% 6.81% 11.80% 8.59%
12/17/2000 0.9244 -98 1.04% -2.90% -7.26% -3.94% 11.09%
1/31/2016 1.1159 -83 -1.39% 2.66% -0.66% -3.36% 11.68%
3/1/2020 1.1284 -94
Average -0.44% 1.02% -0.37% 1.50% 10.45%

This article was written by

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