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A test and subsequent rally could see the pair test the $1.2900 level – although this could be tough going. I prefer short positions on an overreaction through this move and into the 9 September low of $1.2959, with stops at $1.3050.
Fundamentally, the trade makes sense. Reserve managers are huge sellers of EUR’s; we saw that in yesterday’s Chinese FX reserve data. While the EUR has become the world’s preferred funding currency and upside should therefore be limited.
The European Asset Quality Review (AQR) concludes this month – recall a number of banks repatriated non-core assets back to Europe (creating Euro inflows) through late 2013 and into 2014. I would not be surprised to see this trade reverse after the review, with European banks looking for foreign assets.