EUR Longs Reload For LTRO Fallout

At least the Central Bankers are keeping it interesting. ECBs Draghi happened to do that yesterday. Prior to his press conference, the single unit was in danger of becoming ensnared in a monotonous trading range that was sure to dissuade any fresh investment. Draghi signaling that policy makers are concerned that the EUR’s advance could “damp inflation and hamper an economic recovery” had a domino effect on the 17-member currency. Giving the illusion that the current euro-monetary policy is accommodating enough is a ploy that indicates that rates will remain on hold for the foreseeable future.

Structurally, going into the meeting the EUR market was overbought, “buy the rumor, and sell the fact” set in motion an onslaught of EUR repositioning. Draghi’s press conference happened to trigger a plethora of downside stop-loss orders and stop-loss entry positions. Old EUR support levels will now be sold first time around.

For some, yesterday’s EUR market moved too fast for ‘many’ to have exited. The decline in short term EUR rates that caused most of this damage “does not seem justified by any expectation of ECB action.” Draghi’s comments yesterday indicated potential reactions to further tightening in monetary conditions rather than any “discomfort” with the EUR rates or the EUR itself.

Cooler heads will probably lead to some stabilization of the EUR’s range short term. The ongoing drain of excess liquidity in the euro-zone (LTRO repayments), combined with increased real money appetite for European assets should be providing EUR support.

All of the action was not confined to just Europe. China managed to make some waves of its own with stronger than expected trade balance data. The country’s trade surplus narrowed last month to +$29.2b from +$31.6b in December. However, both exports (+25%, y/y) and imports (+28.8%) showed signs of growth despite a still sluggish global economy. Strong economic activity ahead of the Chinese Lunar New Year can be held accountable for some of the good, but it does not explain all of it. In addition, Chinese CPI rose +2% in January, y/y and less than the +2.5% recorded the prior month. Low inflation combined with an expansion in trade keeps Chinese bulls happy.

A polar extreme and many miles away was Italian data providing a totally different story for its country. Industrial production (December +0.4%, m/m) in the euro-zone’s third largest economy, seasonally adjusted, fell to its lowest level in a couple of decades. This is another example of a euro-periphery economy experiencing some mature cyclical attributes, unlike China, a member of Asia’s emerging structural growth economies.

The EUR was not the only tumbler overnight; the mighty dollar took it on the chin against the yen after Japan’s Finance Minister indicated that their beloved currency weakened more than the government expected (-9% since Abeconomics was introduced). However, JPY weakening liquidity remains in place, coupled with the prospect of a more dovish new BoJ governor being announced should keep the JPY on a ‘weakening’ straight and narrow over the medium term.

It’s another big day for Canada. Yesterday, they officially lost their beloved governor of the BoC to the BoE. He put in his transfer, was paid more money, and now he gets to save the UK. Today, we have employment data to amuse us. Analysts expect employment growth to have likely slowed to +4.5k after five-strong months of readings. Even a negative print is possible in a few hours. Other data preceding may show Canadian housing starts probably slowed a bit further as well (consensus is looking at +196k).

The EUR did not experience whiplash yesterday (up and down and sideways), it traded in a massive ‘black’ hole (just down), making it more difficult for some to exit their long positions less costly. Today the session is about consolidating. The 21-DMA at 1.3426 is defining the top of the EUR’s range thus far. Large option expiries appear this morning at 1.34 and 1.3350. To not be surprised if the single unit wants to take back some of its collapse in the next session or two.

Forex heatmap

Other Links:
Can Draghi Bust The EUR Out Of Its Range?

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell