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Is this the time EUR/USD collpases?

Past episodes of banking jitters have prompted massive moves into dollars but this time, things are different. We remain comfortably ensconced within a 1.41/1.45 range.

The fundamental backdrop is not all that different from past periods of crisis. The US bond market remains the safe-haven of choice (as 2% yields illustrate). The risk of QE from the Fed is omnipresent, and a double-dip is a clear possibility. The dollar has surged despite that sort of backdrop in the aftermath of the Lehman-crisis and during the first iteration of the Greek debacle in early 2010 (Greece 1.0).

One would expect a sharp slide in the Euro given this backdrop, as well as the Euro sovereign-debt driven nature of the crisis, but no such luck.

My only explanation for the unexpected currency stability of EUR/USD is the actions of the market’s 800 lb gorilla (or more accurately, panda).  One suspects that they are committing billions to keep EUR/USD in a fairly narrow range, in a historical context.

These sorts of strategies tend to work until they stop…Makes sense to hold shorts in EUR/USD while lightening up below 1.4200 but keeping a core position in case the range gives way. Look for 1.4330/60 to be a tough are to overcome near-term and a decent area to set shorts with a tight stop in the near-term if not already short.

Written by Jamie Coleman
August 18, 2011 at 14:41 GMT