Eurodollar analysis 7th February 2013

Ever since Mario Draghi pledged last year that the ECB was ready “to do whatever it takes” to preserve the euro, the single currency has continued to confound, exasperate and defy traders and market experts alike. Indeed one of the features of the single currency is its ability to rise, phoenix like above all attempts to read it the last rites.

The start of 2013 has once again seen the euro surge to a 14 month high against the US dollar on the back of Draghi’s rosy economic outlook for the Eurozone, with the rally given further impetus by the early repayment of emergency bank loans which are helping to shrink the ECB’s balance sheets. Indeed on 1st February the Eurodollar hit 1.3711, the highest since November 2011 and against the Japanese Yen it is at its highest level in almost three years.

The net result of this action has been an ever stronger euro and Eurodollar at a time when many other central banks have either been overtly or covertly weakening their sovereign currencies.

This continued rise in the Euro has also left many longer term Euro bears forced into taking drastic short covering actions, which partly explains why Euro net longs at the CFTC jumped so dramatically last week.

The argument for a stronger currency has always been that it helps to keep inflation in check by reducing the prices on imported goods, particularly energy and food. However, the downside is, that this increases the costs of exports. So a delicate balancing act is called for.

For the Euro this balancing act is made even more difficult given the inherent structural weakness of the Euro project itself. In other words the disconnect and demands of economies such as Germany whose DNA has been forged on the fears of rampant inflation, as witnessed during the Weimar republic, against the Club Med countries such as Greece, Italy and Spain who have always used devaluation as a means to kick start their economy. However, this inability to do so is currently causing pain and deep social unrest, and for the time being the ECB and their political masters appear to accept that it is pain worth bearing, if it means the continued existence of the Euro.

Today has seen the ECB maintain interest rates at 0.75% and during the follow up press conference from Mario Draghi, the Eurodollar has responded by falling, following a period of sideways consolidation and at time of writing is testing the interim support in the 1.3456 area. Should this fail to hold then the pair may move deeper to re-test the 1.3410 price area, where a more substantial and sustained platform of support awaits.

Today’s fall is also as much as a result of the recent price action on the daily chart, particularly the shooting star candle of 1st February, which was also accompanied by high volumes, which failed to push the price even higher, always a classic sign of weakness and a potential reversal.

From a technical perspective shorting the Euro is a perfectly acceptable strategy and today’s pullback should be seen as just that. Indeed since starting this article the Eurodollar is now pushing back higher towards 1.3472 and appears to holding its interim support level.

Moving forward, the outlook for the Euro from a fundamental perspective remains positive, and any thought of lighting its funeral pyre would be presumptuous in the extreme, and many have been burnt by trying to do so. Saving and preserving the Euro project is the force which drives the Euro and it is a force traders should be aware of and not try to fight, because it is fight they will not win.

By Anna Coulling

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Charts courtesy of Hawkeyetraders

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