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Selling Euros Whenever I Can...Except EURCHF

Selling Euros Whenever I Can...Except EURCHF

2012-03-01 15:31:00
Christopher Vecchio, CFA, Senior Strategist
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Well, the in the Euro leading up to the ECB's LTRO was rather...flat. The trepidation market participants showed in the days ahead was more intense than I expected. With that said I am now very bearish the Euro, except against the Swiss Franc. Here's why:

First, the Euro is facing its own downside pressure given the recessing Euro-zone region. German put in negative growth, and we've already seen the effects of austerity in the periphery: growth has been worse than expected. This trend will continue for the coming quarters. Secondly, the ECB has embarked on a substantial easing policy, one that will ultimately prove dilutive to the currency.

To this end, with extra Euros in the global financial system, institutions will then sell Euros and buy higher yielding currencies, such as the Australian and New Zealand Dollars, to capture “yield.” Going forward, I am extremely bearish the Euro versus the commodity currency block, barring any unforeseen tail-risks.

Now, while the ECB's measures are Euro dilutive, they're also risk-positive. At the end of the day, that means that the commodity currencies will rally against lower yielding assets, such as the Japanese Yen, U.S. Dollar, and especially the Swiss Franc (the Franc has held a +0.93 correlation with the Euro since September 6: higher Euro, higher France, and vice-versa). There are some very bullish patterns on the table now that suggest we could be heading towards new all-time highs in the Australian Dollar as well.

- AUDUSD: A Bull Flag has formed on the daily chart. The Flag Pole is off the January 9 low to the Feburary 8 high. The Flag is the descending channel consolidation from February 9 to February 29. Today, the pair is breaching the topside channel resistance. Should AUDUSD close above 1.0760 today, I'll be looking for a subsequent close above 1.0860 (above 2012 high and ascending trendline on October 2011 and former 2012 higher) to confirm this move. The measured target on the Bull Flag is 1.1165, above the all-time high set in July at 1.1079.

- EURAUD: The pair is set to close below its 50-DMA (1.2415) and 20-DMA (1.2339) today. A break below the 61.8 fibo on the February low/high rally at 1.2317 should confirm that the move higher has been broken. A confirmation of a daily close below the aforementioned three levels should clear the path for a test of the 2012 low at 1.2133.

- EURCAD: Similar to the EURAUD, the EURCAD is set to close below its 20-DMA (1.3195) and its 50-DMA (1.3149) today. A break below the 61.8 fibo on the February low/high rally at 1.3104 should confirm that the move higher has been broken. A confirmation of a daily close below the aforementioned three levels should clear the path for a test of the 2012 low at 1.2871.

- EURCHF: I noted this week, "With the pair flirting with the 1.2100 handle, I'll be looking to buy on a dip below 1.2050, but closer 1.2030, the 2012 low. Reward/risk is high, given the monetary and political pressures on the Franc." I have initiated a small long EURCHF position at 1.2050, and I will add below 1.2030, as scheduled. There is a March 15 Swiss National Bank meeting that will be critical to this trade.

- EURUSD: I noted last Wednesday, "An hourly triangle is forming, with an explosive move higher or lower expected in the coming hours. A sustained move above 1.3320 could lead to a rally to 1.3600, and I will get heavily short at said level, given trendline confluence." Having clear the 100-DMA, the short-term pattern suggests a break to 1.3600, and I maintain my bias to short at this level. Should we break the 100-DMA and subsequently break the ascending channel that suggests support at 1.3200, I believe a test of 1.3000 and then the yearly low at 1.2626 are due shortly thereafter.

- USDCHF: EURUSD weakness should prompt USDCHF strength. I will be building into a long position on futher EURUSD weakness, especially ahead of the March 15 SNB meeting. I'll be buying on dips towards 0.8950. Topside resistance comes in at 0.9178, the 100-DMA.

Any other trade ideas and general macroeconomic musings can be found in the Real Time Newsfeed, or by following me on twitter @CVecchioFX

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