Why the Euro is Going Lower - Round 2

In my last article located here, I had shorted EUR/USD with a stop at 1.3375. As usual when getting stopped out, I asked myself what had gone wrong. My conclusion was that price action can easily give misleading signals when multiple central banks are intervening in the market and distorting prices. (Points finger at the BOJ and SNB.)

I still like EUR/USD lower to 1.3150. After I got stopped out, I analyzed the situation and re-shorted the Euro at 1.3370 and now have my stop loss in front of my entry so that I won't lose money if various central banks around the world decide they want to continue buying European government bonds and price rips up towards Ashraf Laidi's 1.3500 EUR/USD party.


What To Watch For
I'll be keeping a close eye on the following currency pairs:
EUR/CHF - Will the SNB continue selling francs?
USD/JPY - If this pair continues to climb then it's a positive for equities (Japanese stocks rip higher and the effect bleeds over into the other stock markets.)
EUR/JPY - If USD/JPY goes higher than what's everyone's favorite yen cross? So far it's been EUR/JPY. When you have such a parabolic move in a particular currency pair such as the Yen, arbitrage plays a very distinct role. >> (check out EUR/USD, EUR/JPY, and USD/JPY going back to 11/14/2012)


Why the Euro is going lower - Round 2
My three fundamental reasons behind originally shorting the Euro:

1. There's far too much complacency in the market. I don't see an obvious reason for the correction; but with equity markets pushing record highs, the VIX plunging to lows, and general sentiment being complacency, I think the most amount of people would get hurt by the markets falling - therefore I consider it likely. The negative effect on risk appetite should cause EUR/USD to fall.

2. I thought the hyperactive traders buying Euros and selling francs over at the SNB would take it down a notch. Not so. EUR/CHF spiked up from 1.2370 on 1/17 to 1.2570 on 1/18, a 200 pip rise corresponding with EUR/USD's re-test of 1.3400. It just so happens that when a central bank begins devaluing their currency with a passion, it can give price action a parabolic shape.

3. Issues of a Cypriot bailout make media headlines. Again. The spread between the German and Spanish 10 yr bonds has narrowed substantially in 2012. I believe mean reversion in the near term is likely, as investor continue to pile into European stocks and bonds on the trumpeted declaration that the Eurozone is saved.



Alternative Scenario
The uptrend continues and the Euro rips higher. Be careful.


BeamFX is a Guaranteed Introducing Broker for Institutional Liquidity (ILQ). You can open a live trading account with us here.