It just keeps getting better for us and for our signal subscribers. It was about 2 weeks ago when we first floated the idea of going short the euro against a basket of currencies. Since then, things have panned out rather nicely and we were able to profit from our calls. We believe there is still more cold wind that will confront the single currency bloc, even after the traumatizing attacks in Paris 10 days ago.
After winning 280 pips on EURAUD last week, we approach this week with relative caution because we felt the bulls would step in to defend key technical levels on the euro. And defend those levels they did. Euro started the week short term bullish. EURAUD opened lower but reversed those losses in a couple of hours.
On Monday itself, we went short for the second time on EURNZD. The pair had pulled back into our "breakout pullback selling zone", where we believed the sellers would step in again. This zone has remained critical in the short and medium term for EURNZD, and bears fought hard.
We shorted exactly at 1.6325. Our "breakout pullback selling zone" was well respected and held albeit with choppy price action going deep into that zone. However, with much resolve the bears eventually pushed through with EURNZD falling 140 pips today.
We are now short EURNZD at 2 different locations. Our base position was at the top of the range (which has since been completed), and one which this update is about.
Why? Because of the very same fundamental forces we talked about. We foresee yet more downside to the euro in the medium to long term, just based on these factors. While we don't expect the decline to be a smooth one, bears have plenty of opportunities to profit.
Citi opines on what the ECB may bring in less than 2 weeks time:
"Sourced indications the ECB is considering a two-tiered approach to further depo cuts suggests to us bigger cuts are being considered than Citi Economists’ 10bp base case. As we find, changing in rates are having a bigger impact on FX than they did when rates were positive. The coefficients we back out suggest a 20bp cut to a -40bp depo could take EURUSD closer to 1.04.
Worth keeping in mind here, through asset purchases there’s still about 500bn EUR of liquidity to come before now and September 2016. Increasing the term to mid-2017 would make this 1tn and increasing the pace at the same time to 80bn would put it closer to 1.5tn. Even at a -20bp depo that represents 3bn EUR of losses to the extent negative rates are not passed on to depositors and banks reduce margins.
A system which exempts a degree of deposits isn’t necessarily new and we have seen in Switzerland almost 65% of deposits exempt from negative rates using a multiple of minimum reserves. Still, CHF LIBOR has been fixing close to the -75bp, move to -80bp since expectations of ECB ease picked up. Following the very dovish speech from President Draghi last week, targeting higher inflation as quickly as possible, an ECB overwhelm looks on the cards."
On the charts, EURNZD has cleared the swing lows of 1.6200 with conviction, leading us to believe more downside is installed. We are bearish for the short, medium, and long term and are targeting our "primary target" zone before meeting significant buying.
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