Stronger at the Dollar's Expense
Fundamentals
The Euro is higher ahead of this morning's housing starts number, which may provide a boost for equities. The pan-European currency has found itself the beneficiary of traders shunning the lower yielding reserve currencies - the Yen and Dollar. Investors have become more vocal with their concerns about swelling budget deficits and elevated levels of liquidity as a result of government interventionism. Now that economic conditions around the globe have shown significant signs of improvement, world leaders are currently faced with the problem of attempting to extract some of the liquidity, without completely pulling the rug out from underneath their respective economies. Logic and history would tell us that leaders will likely err on the side of continuing aid and running deficits, rather than being fiscally responsible, to keep their constituents content. Politicians quickly forgot about the Nasdaq, housing, and commodity bubbles that were created by keeping liquidity too high for too long. The European Central Bank has, in its brief history, shown itself to be more hawkish than the Fed, which makes it the odds-on favorite to raise rates sooner and more aggressively than the US central bank. This will likely lead to the Dollar finding itself on the short side of the carry trade for the foreseeable future. The continued strength of equity markets also bodes well for the Euro, as the increased risk-taking by investors suggests traders will avoid US Bonds and Dollars.
Trading Ideas
The fundamental outlook for the Euro continues to appear to favor the bull camp, but the technical picture remains a question mark. It is difficult to imagine the Euro losing ground to the greenback, as traders cannot find a good reason to go long the Dollar. Any Dollar rallies would suggest that currency traders are covering shorts rather than actually going long. Because the technical picture remains unclear, some traders may wish to wait for a bullish technical breakout in the form of a solid close above the 1.5034 level before entering into a long futures contract. If traders do choose to go long at or above 1.5034, they may possibly wish to work a sell-stop at 1.4925 to protect their downside, with also a profit-target limit at 1.5300. This trade risks roughly $1,362.50 for a potential profit in the neighborhood of $3,325.
Technicals
Turning to the chart, the December Euro seems initially reluctant to cross through 1.5000. Prices would have to cross this level to maintain their upward momentum. If the Euro is unable to break through, the chart begins to look much more toppy in the near to intermediate-term, with a close below 1.4675 signally a double-top formation. Prices have been hovering near the 20-day moving average. A close below the average suggests that a near-term top may be in place. The oscillators are giving neutral readings, with the RSI at 55 and momentum clinging to the zero line.
Rob Kurzatkowski, Senior Commodity Analyst
