Trade idea: The Euro

The European Central Bank (ECB) has given a clear view that it will look to do more to promote growth and inflation at the December meeting.

Source: Bloomberg

Most economists had largely been expecting further stimulus given the ECB’s future economic forecasts were probably about 50 basis points too high. But the tone of Mario Draghi, as well as ECB board members Praet, Constancio and Coeuré, has certainly been more definitive than many had anticipated in recent narrative. Of course, many will also see the moves to ease policy further as an indirect way of targeting a weaker currency, which has been strengthening on a trade-weighted basis of late.

Two areas I’m interested in:

  1. What exactly will they announce at the 3 December meeting?
  2. How will the market trade the EUR and Euro markets in both the lead up to and after the meeting?

Specifically, I feel we are likely now to get a deeper deposit rate cut to -30 basis points and this is largely already being reflected in the interest rate markets. This would have an effect not just around the amount of new bonds the ECB could buy, but could also see more capital leaving Europe, causing EUR weakening. We are also likely to hear about either an increase to the current size of the QE program to €80 billion, potentially increasing the range of instruments it could buy (such as corporate bonds).

This all suggests taking a bearish stance on the EUR, specifically against the USD and JPY. I also take a short-term tactical view that the AUD could appreciate against the EUR.

Trading views

EUR/USD – In my opinion, EUR/USD is a sell into $1.1100 and the former April uptrend. The 10-, 20- and 30-day moving averages are not formally aligned as yet, but they are headed lower and about to give a trending sell signal. I would look at placing a stop at $1.1210, just above the 50% retracement of the October sell-off, for a move back into the $1.09 area.

Click to enlarge

EUR/AUD – Given the RBA meet tomorrow, trading the AUD in general is fraught with dangers. However, tactically I feel being short EUR/AUD makes sense, given my view that the RBA will leave rates unchanged. The market is pricing in a 40% chance of easing, so if rates are kept on hold and the bank doesn’t give a definitive guide that they will cut in December, then the pair should fall heavily.

Unlike EUR/USD, all three short-term averages are in alignment and headed lower. This gives me some confidence of the prevailing trend lower. As long as the pair holds below the April uptrend at A$1.5660, then I would be trading this from the short-side.

EUR/JPY – This pair trades lower in the short to medium-term. I think the Bank of Japan are finished with easing, while the ECB are easing again. There is growing central bank divergence which isn’t fully priced in.

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