The EUR/USD has been a graveyard in recent weeks as short term traders and scalpers have been whipsawed back and forth. My philosophy for trading the Euro is simple. I ask myself, "what direction does the Euro have to move in for the most traders to get hurt?" I don't believe it's any coincidence that the Euro has been climbing since the COT data came out and revealed that an unusually large percentage of traders who had EUR/USD positions were net short.
Lets talk about price action. I know that EUR/USD has been really choppy, so I've just been counting on the choppiness. Price tends to bounce off of levels of psychological significance levels like "big figures," the 200 day SMA, Fib levels, and previous daily closes. I count on it reversing at a key level after a significant move, simply because I know a move in the opposite direction will hurt a lot of traders. It sounds simple in theory, but in practice, it's difficult to wait for that oversold or overbought condition when it has just run up a hundred points and I can get a great entry. Patience is crucial.
Where will the Euro go from here? Well, if the COT data is any indicator, I think the most amount of traders could be hurt by a continued move to the upside. Most importantly, the main driver of the Euro at this point is the perception of the Eurozone's stability. Being an economist by trade and an avid fan of Zerohedge, I do realize the disconnect between the market fundamentals and the equity and debt markets. However, the support for the Eurozone and Euro is largely a matter of perception. If institutional investors and traders feel that the Eurozone will not collapse and that Draghi and political leaders will be able to maintain stability, then their risk appetite will increase. (Check recent levels on Spanish & Greek bond yields.) An increase of funds being invested in Europe means a greater demand for Euros. The price action in European bonds tells us that the crisis in the Eurozone has stabilized recently. The market fundamentals have deteriorated, but does that really matter? From what I've seen, the perception of stability has been trumping the market fundamentals in the short term.
The Spanish Bailout: sooner or later, Spain will get bailed out by the European Central Bank. The only choice Spain has is exactly when it wants to ask for the bailout. Bad economic news coming out of Spain recently has only helped the Euro to go higher, as it "increases the chances that Spain will ask for a bailout sooner." I think this is complete hogwash especially since I find it unlikely that Spain will request a bailout before the local elections on Oct. 21st. The EU summit is this weekend though, so anything is possible and rumors will probably fly.
On a side note, I find it unlikely that Greece will exit the Eurozone before the U.S. presidential election due to the delayed Troika report. If this is the case, they will most likely get their next tranche of aid later this month and the can will be kicked further down the road.
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