Why Stronger EUR Is Here To Stay

By world market pulse team on October 19,2010

Traders are likely to remain in a Euro Bullish mode despite the firming up of the US dollar amid Improved Home Builder Confidence even as EUR together with Scandinavian currencies under performed the rest of G10 at the start of the week after investors sought to take profit on their USD-short positions. EU’s Economic and Monetary Commissioner Olli Rehn has meanwhile indicated that the currencies will feature prominently on the agenda after Eurogroup’s Chairman Juncker had said that there has been too much volatility between the main global currencies.

According to analysts at CitiFx, ahead of the G20 meetings in Korea, euro area officials should continue to concentrate their efforts on promoting coordinated solution to the ‘currency wars’. In this regard we would expect to see further calls on EM economies to allow more flexibility of their currencies. At the same time there should be still fairly muted critique (if any) of the Fed plans to potentially add to its unconventional monetary policy accommodation. We think that the European officials continue to see the problems of euro area’s fiscally weak members as a far greater threat to its stability and growth outlook than the strong EUR of late.

Possible ECB Intervention: Even though the basic decision to intervene on the FX market lies with the ECOFIN, the economy and finance (and budget) ministers of the euro zone member countries, there is a possibility that the ECB could still take part in the discussions as a consultant. Analysts feel that the ECB is thus much more closer to the decision making process than say the BoJ which acts as an agent of Japan's MoF. On the flip side, the ECB has shown very little desire so far to engage in any interventionist talk or indeed into discussions about the EURUSD level.


EURUSD – Friday’s daily chart posted a significant daily reversal, which could well indicate that a period of consolidation could well now be due. This daily candle is classified as “dark cloud cover” or a weaker form of engulfing pattern and yesterday’s down move stopped short of the 1.3800 levels rebounding from 1.3830. Meanwhile according to Deutsche Bank analysts, investors had no reason to sit on any open positions after the Fed chairman Bernanke's speech on Friday until the central bank begins QE2, as they had already received confirmation and the market had already processed the information. Given that a significant amount of euro-shorts were forced out during the euro-rally last week, the weakness on Friday afternoon is transformed into bull-market exhaustion this morning. Our risk limit was undercut, leaving us with a neutral outlook. Significant corrections will be in order below 1.3850.



Euro ETFs To Watch Out For:

Rydex CurrencyShares Euro Currency Trust (FXE): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

Short Euro ETFs

ProShares UltraShort Euro (EUO): ProShares UltraShort Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the U.S. Dollar price of the Euro.

EUO Tracks: Euro (-200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Short Euro ETN (DRR): As the Index is two-times leveraged, for every 1% weakening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

DRR Tracks: Double Short Euro Index. Expense Ratio: 0.65%

Long Euro ETFs

ProShares Ultra Euro (ULE): ProShares Ultra Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the U.S. Dollar price of the Euro.

ULE Tracks: Euro (200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Long Euro ETN (URR): As the Index is two-times leveraged, for every 1% strengthening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% weakening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

URR Tracks: Double Long Euro Index. Expense Ratio: 0.65%

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Can GBP Beat The Double Dip To Stay Positive?

By world market pulse team on October 13,2010

Sterling traders have been worried over the news about falling house prices in the UK with the release of the RICS House price survey for September which indicated that the number of surveyors reporting falling home prices increased relative to those reporting increases. The release not only corroborated the view that the UK housing market continued cooling recently and weighed on sterling sentiment but is also one of main reasons why ‘double-dip’ is starting to reappear in market discussions after the pound lost a little ground yesterday.


Inflation Report Supporting GBP: Despite data pointing to weakening demand and a cooling housing market, the CPI data release out of the UK corroborates the view that QE2 is still only a distant prospect. The CPI release indicates that inflation remains well above inflation targets with headline CPI at 3.1%, core CPI at 2.7% and RPI at 4.6% (all year over year figures). The CPI figures were almost exactly in line with expectations although the RPI came in slightly higher than the expected 4.4%. Positive inflation surprises last month triggered a temporary correction higher in market inflation expectations as proxied by the implied rate of the UK 5y Inflation swap.

Analysts at World Market Pulse expect that the inflation support is likely to continue adding to the GBP strength in the short term despite the release of the RICS House price survey; while analysts at the Deutsche Bank believe the door to further near-term gains to 1.6090/110 remains open as long as support at 1.5800 is unbroken. Indeed, an early dip to 1.5860 would create the necessary risk-reward conditions for a new bullish

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Britain Economic Overview: The Bank of England has reported a decline in services output in both June and July. Consumer confidence deteriorated more than expected last month. Industrial output is off 11% from pre-recession levels and has been flat since February. Retail sales seem to be holding up pretty well but consumer credit was up a meager 0.2% y/y. Business lending has fallen for five consecutive months. The government feels the Bank of England can come to the rescue if the economy does show serious signs of faltering as cuts and tax hikes hit home. Maybe yes maybe no; the BoE interest rates remain at record lows but QE remains an option. However, with the planned deficit reduction it seems unlikely that economic growth can do anything other than head south over 2011.

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