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EUR/USD 1.3500 - Only a Matter of Time?

Last updated 2/18/2010 1:41 PM ET (GMT -5) 31 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD has hit an eight month low of 1.3540 at the start of early morning  European trade and the pair is threatening to target stops at the psychologically important 1.3500 level as the day progresses. The weakness in the euro is now no longer due to risk aversion but rather the result of concerns about laggard growth in the region.

The credit spreads of Eurozone’s most problematic economies are actually well off their highs with Greek/Germans bunds below 320 basis points after the Greek Prime Minister reiterated the notion that Greece is not asking for a bailout but simply for more time to reform its budget deficit. At the same time the latest treasury auctions in both Spain and Portugal have seen strong demand indicating that funding  for the rest of Southern Europe is not an issue for the time being.

Yet the economic toll of the budgetary austerity now being imposed on EU member states is likely to  stifle growth in the next several quarters and dampen investor enthusiasm for European assets. The region’s chronically weak consumer spending will likely deteriorate further under the weight of reduced government spending and increased taxation that is sure to come. Perhaps the only bright spot on the horizon is the decline in the exchange rate which should help the key export sector, but the gains are unlikely to offset the downward pressure on overall demand.

Meanwhile growth across the Atlantic appears to be improving as the latest batch of US economic data has surprised to the upside. The rally in the dollar is being driven by the idea that US economy will perform much better than EZ in 2010 and will therefore be the first to exit from the ultra accommodative monetary policy later this year.   Yesterday’s FOMC minutes helped to fuel that theme further when they revealed that the US monetary authorities have started to discuss the specifics of the exit strategy at their last meeting in January.  

The EUR/USD  has repelled every effort to run the stops at 1.3500 level so far and given the large amount of option barriers at that figure the pair may hold support until the New York fix at 15:00 GMT today, However, if US econ news once again proves positive today support could finally give way. The tight correlation between EUR/USD and DJIA which dominated trade throughout 2009 has now totally broken down and any rally in US equities is likely to push the pair lower with a test of 1.3500 only a matter of time.   

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Comments (31)

schultzz.at

February 18, 2010 at 04:48 AM ET

Boris, I wholeheartedly agree. There are multiple catch 22 issues. The fiscal tightening will suffocate growth, but the lack of growth will make the high debt loads look even more daunting. The weak euro certainly will help some industries, but at the same time the euro area will import inflation if the dollar value of commodity prices remains stable.

It has become challenging to reenter this market, because any minor rally is sold hard. I am now trying to reestablish shorts at 1.3725.
Tom Schultz.

bschlossberg

February 18, 2010 at 05:02 AM ET

Yes trading this move is treacherous but the pressure builds

FXDragon

February 18, 2010 at 06:15 AM ET

We believe its too early to correlate strong dollar with higher stocks. Equities are expected to continue bearish here even though job improvement possible.

Sincerely,

alexjbrandt

February 18, 2010 at 07:17 AM ET

The correlation between the Dollar Index and 10 yr treasury bonds is .74 since 01/01/10.

Where as the Dollar Index and DJIA has a correlation of -.87 since 01/01/09.

I think that US equities will rally a bit more given that the economic outlook has improved.

alexjbrandt

February 18, 2010 at 07:20 AM ET

So the dollar does have a pretty strong correlation with stocks, just that its negative for the last month and half or so.

schultzz.at

February 18, 2010 at 07:36 AM ET

I have exactly the same value (-0.87) but for the EUR/DOW correlation starting on 01/01/10. The stock market tries hard to help the single European currency. It's only that the Euro has already entered Dante's Inferno, not only versus the dollar, but versus other major currencies as well.
Tom Schultz.

bschlossberg

February 18, 2010 at 07:41 AM ET

Actually since Feb 8th the correlation between EUR/USD and DJIA disintegrated markedly. That is my key point. Euro is no longer a risk trade,

Semaj

February 18, 2010 at 07:48 AM ET

Does 1-2 weeks of market action erase 1 year of correlation?

alexjbrandt

February 18, 2010 at 08:06 AM ET

lol. I enjoy your references/analogies tom :)

Does 1 or 2 weeks erase 1 year of correlation, I suppose not. But it could be the start of a new trend maybe? IDK.

Semaj

February 18, 2010 at 08:52 AM ET

Let's assume we are trading the correlation of 87% negative on 1 year. That yields a 13% variable. Then 2 weeks of performance is less than 5% of 52 weeks which is within the correlation variable. It seems to me we need at least 2 months of data before jumping to conclusions. Just a thought :)

bschlossberg

February 18, 2010 at 09:19 AM ET

Correlation is just the reflection of underlying fundamentals. By the time it changes the trade has really moved on. Relying on correlation is like driving using a rear view mirror. The question forward is who is more likley to grow faster - US or Europe? If you think US, the risk trade in EUR/USD breaks down

Semaj

February 18, 2010 at 09:49 AM ET

I do agree, fundimentals build the charts. But when correlations are strong such as the Dow/Dollar example here, it does give me added confidence in placing a trade setup, especially intraday. Much respect in your views, thanks.

BTW, Dow is up & Dollar is down as NY opens so far, 87% is winning.

hsbc

February 18, 2010 at 10:54 PM ET

MIRROR

Silenus

February 18, 2010 at 07:11 AM ET

I'll take the other side on this one guys.
No real arguments (except for the low RSI) but intuition tells me the short side is just 'too easy'
Get long for the big 'spike' bottom and fast run up to 1.3800+ today or tomorrow.

alexjbrandt

February 18, 2010 at 07:24 AM ET

The only risk to going long is that Italy could be worse then Greece, which would probably drive the euro to 1.30ish. Two months ago, I was thinking that the euro would be up at 1.6 by late February, I never thought that we'd be seeing 1.38 much less 1.35.

NEW Trader

February 18, 2010 at 01:08 PM ET

didnt i read this...should have stopped out badly,thanx SILENUS!

fishmanszmit

February 19, 2010 at 04:08 AM ET

Can you elaborate on this Silenus? Is there a certain time you think this will happen? A news release or something? Thanks! It is at 1.3505 at 4am EST.

fishmanszmit

February 19, 2010 at 10:48 AM ET

Silenus, The PMI data came ouyt and was not affective, correct? Does this change your outlook on the EUR moving to 1.38? Was that the news that should have made it happen? Thanks dude! have a good weekend.

MHW

February 18, 2010 at 03:11 PM ET

Boris, you said that EUR/USD hit an 8 month low on 2-18. This
is incorrect according to my aggregate price charts (Comstock),
which shows a low of 1.3530 on 2-12 and a low of 1.3539 on 2-18.
In terms of the technical action, this may prove to be critical
because, as of now, it looks like EUR/USD wants to close on the
high side of the range for today. If it has such a close and
then rallies above today's high (1.3656) on 2-19, then today's
action would be the first daily "higher low" that EUR/USD has
seen since Jan. 6th. That looks bullish to me.

bschlossberg

February 18, 2010 at 03:42 PM ET

Yes correct today was the 2nd lowest day of the year. EUR/USD still looks like its struggling at 1.3600 moreover yesterday's reversal was very bearish. The key will be tonight's PMI data. If it can't show any positive economic momentum its doubtful euro will have any juice to rally.

MHW

February 18, 2010 at 05:52 PM ET

Forget everything I said 3 hours ago.

bschlossberg

February 18, 2010 at 10:24 PM ET

:) That 's markets.

wwwin

February 19, 2010 at 01:19 AM ET

now you are going to pay more attention when the feds get hawkish again...they were mad thet nobody was taking their words at face value hehehe

enslinFX

February 19, 2010 at 02:13 AM ET

Hi there - where can I find a currency valuation model which is reasonably quick to update with new developments/expectations?

Hope anyone can help

Cheers

Silenus

February 19, 2010 at 04:34 AM ET

Fishmanszmit. Dude there is no reasoning here - just commonsense. After yesterday's 'exogenous event'. we get a doji on the daily, then up, up and away trapping everybody. Seen it many times before.
If you're long at about 1.35 you risking less than a 100 to get at least 300 from the trade (I think more) The EUR is NOT going to collapse. How do I know? Cus it would have done so already by now.

Silenus

February 19, 2010 at 05:00 AM ET

Just want to add to the last post for all 'cowards' that don't buy lows.
Ok let's do it this way:
1.Doji or hammer on the daily today
2.Entry buy stop at today's hi + x
3.Exit stop at today's lo - x
4.Take next week off.

schultzz.at

February 19, 2010 at 05:52 AM ET

Silenus, I am a coward. 'Abandon every hope, who enter here' (Dante, The Divine Comedy, Inferno, Canto III).
I have lost any faith in the euro area and also the U.K.
I see some possibility that we rally to 1.37 in EUR/USD in some days. So I am planning to reestablish shorts at this level.

In addition, I am planning to short the Euro versus the Norwegian krone. I placed an order at 8.1350 kr and see a realistic possibility that this order is triggered today.
Tom Schultz.

Silenus

February 19, 2010 at 06:07 AM ET

Schultzz: Norweigan Krone??? What's the spread on that? 50 points?
Forget about it!
Sure the EUR is weak just undervalued against the USD
Wanna short EUR? Try EURJPY sometime next week.

Silenus

February 19, 2010 at 06:07 AM ET

Schultzz: Norweigan Krone??? What's the spread on that? 50 points?
Forget about it!
Sure the EUR is weak just undervalued against the USD
Wanna short EUR? Try EURJPY sometime next week.

schultzz.at

February 19, 2010 at 07:16 AM ET

I knew that this argument would coming. RBS quotes a 2.5 point spread on the Norwegian krone and the Swedish krona compared to 1 point in EUR/USD. So this is still within my pain threshold.
Anyway, I just wanted to underscore that the Euro sell-off is broad based.

I am long the USD/JPY for two weeks and I plan to sell soon as I expect an increase in volatility.
I am not trading the EUR/JPY.
Tom Schultz.

FXDragon

February 19, 2010 at 08:13 AM ET

Not next week. I will short yen pairs after nfp.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.