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Faros Morning Update - The Future Looks Bright for the EUR/USD Less so for the USD

|Includes: CNY, FXA, ProShares Ultra Semiconductors ETF (USD)

 The Future Looks Bright for the EUR/USD Less so for the USD

Today, markets will likely talk about the EUR/USD rally as a retracement of a broader downmove.  We see today’s bounce as the completion of a retracement related to a broader up move. One tool we use to assess this turn is the chart attached below.  The chart of the mean regression of the EUR/USD up move since China flexibility was re-introduced.  Tuesday’s low touched the 2nd standard deviation mark of that regression and marked a potential turning point.  Indeed, we witnessed a wall of buying of the EUR/USD by Asian Central Banks at that level.  This mirrored what we witness back in August before the EUR/USD went on its extended march through 1.4200.  Back then the EUR/USD had completed its retracement within a broader up move, right at that 2nd standard deviation level.  Prepare now for a broader EUR/USD up move. 

 

Overnight comments in China focused on the heavy increase in food price inflation in the mainland.  A situation that historically causes massive social unrest and is one of the top concerns of Chinese politicians.  A UN report was also released citing the same concerns.  PBoC Zhou was on the tapes saying that a stronger CNY can ease inflation.  Our feeling is that they will likely use all tools available including, RRR hikes, interest rate hikes, currency appreciation and price controls.  Indeed the state council meeting yesterday reinforced price controls as one of their primary tools.  We have attached a chart below indicating that last time they had this rampant inflation in China was in 2007 / 2008 and in that period they allowed the CNY to strengthen at a more rapid rate while increasing interest rates.  This also led to DXY lower and EUR/USD higher, (chart attached).  Reinforces our argument for EUR/USD to enter another rally stage.

 

Markets rallied despite the concerns in China and the announcement of a 2nd round of stress tests in the US and we saw regional equities move higher while regional FX moved higher.  USD/KRW dropped down to 1134 despite further conversation of capital controls and introduction of the concept of a tax on FX forwards that was floated out by the Korean Fin Min.  

 

We heard of models selling USD/MYR down to 3.1225, selling USD/KRW and selling USD/PLN and USD/HUF in the London morning session.  USD/PHP found BSP bids to stop its move lower while INR was a notable underperformer throughout the bulk of the overnight session with rumors of the SKS IPO from a few weeks ago, going bust, but we managed to finish slightly lower on the day in USD/INR down to 45.23.

 

Early in NY we are getting comments from Ireland as a package seems to be close to be announced.  Ireland is holding firm on their corporate tax rate at 12.5% in early ‘tape bombs’ but by and large the market is feeling more comfortable about stability in Ireland for the time being.  We note a massive rush out of the ‘safety’ debt countries and back into riskier debt nations with the periphery bid and bunds, US T-notes, and Gilts all getting hit pretty hard. 

 

EUR/USD is testing 1.3650 with the DXY now down 0.5% and silver and softs off the lows from yesterday in meaningful amounts.  Oil the notable laggard.  We heard of BIS selling around 1.3650, likely for the Middle East on lower Oil prices recently.  Recent drawdowns in inventories combined with stability in Euroland for now, may lead to a short term rally in Oil.

 

HUF, PLN, TRY, BRL, and KRW are all retesting their 50 day moving averages after having broken then in recent sessions.  These levels will act as support for now a break there opens a sharp move lower as the world re-embraces the ‘risk on’ paradigm.

 

USD/CAD initially lagged the recovery in commodities but is back through its 50 day at 1.0191 for now.  We heard of aggressive model buying in SEK and NOK as models re-added to risk but largely avoided EUR, GBP, JPY for now. 

Good Luck



Disclosure: no positions