Medium term
Trade view / 13 November 2015 at 14:12 GMT

The push for EURUSD parity

Managing Partner / Spotlight Group
United Kingdom
Instrument: EURUSD
Price target:
Market price:
Background

The preliminary set of Q3 Eurozone GDP figures were underwhelming as the year-over-year growth rate was expected to come in at 1.7% but instead posted 1.6%. The quarter-over-quarter reading was woeful at 0.3%, slipping back from the prior observation of 0.4%.

In combination with much anticipation for an accommodative December from the European Central Bank and the prospect of the Federal Reserve commencing the breakaway from zero rates, there is little to support the euro at present.
EURUSD
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Source: www.investing.com

ECB president Mario Draghi struck a dovish tone as he testified to the EU parliament yesterday, and all but confirmed a stimulus expansion at next month’s policy meeting.

He said that “normalisation of inflation could take longer than anticipated,” adding that downside risks are “clearly visible” and warning that a “signs of a turnaround in core inflation have weakened”.

I would urge him to stop clinging so blindly to the internal inflationary forecasts that have been misguided for 18 months. This is what he did for too long before moving to a negative deposit rate. It is also the same story before he finally approved the initial quantitative easing programme .

Of course, forex markets are skittish and can be highly volatile. So for a short period of time the EURUSD will find a tiny amount of upside drift… I cannot call it momentum as the retail sales data from the US for October have not met expectations (although they are better than in September).

  • Headline Retail Sales October: Actual 0.1% Expected 0.3% September 0.1%
  • Core Retail Sales October: Actual 0.2% Expected 0.4% September minus 0.4%
  • Retail Sales ex gas and auto: Actual 0.3% Expected 0.4% September 0.0%

I am short of the euro against the Dollar and while I am not personally adding to my short I am minded to start targeting a slide toward parity.

The monetary policy divergence has been well documented but also the Eurozone has two national trouble spots in Greece and Portugal; come December it may also be that Spain, the bloc's fourth largest economy, will be run by a left-of-centre coalition who oppose the austerity programme and seek to be cavalier with borrowing and spending.

Draghi has a hard mandate to ever get inflation back to 2.0%, I cannot see him doing it for at least the next two years. I have no desire to be long of the euro against the USD until parity is printed.

EURUSD five-year chart:
EURUSD 5 Year
Source: www.investing.com

Management and risk:

I am already short from October 20 at 1.1374. All my downside targets have been achieved but now I want more.

Targets: 1.0530… 1.0360… 1.1025… 1.0000 

Profit Protection: 1.0900

— Edited by Michael McKenna

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Non-independent investment research disclaimer applies. Read more
2y
vanita vanita
Dear Steve,
Please Can you suggest some hedging currency pairs ?
Pairs related to usd, EUR,jpy and GBP.
If you have another currency den also please suggest.
Thanks and take care Steve.
2y
Stephen Pope Stephen Pope
As the Dollar rises we see commodities fall. A reversal of the Dollar would help commodities and two currencies that can benefit are Canadian and Australian Dollar.

Against the Euro outside of the main currencies look at Swiss Franc or maybe the Danish, Norwegian or Swedish Kroner.

I think the same will work against the Pound.

AS for the Yen...I think Australian Dollar is the right choice.
2y
vanita vanita
Dear steve,
Can you evaporate you message in simple way.
You means to say
1)Buy usdaud & sell usdcad.
2)Buy jpyusd & sell audusd.
3)EUR I could not understand which is hedge currency.
So please in this manner with
Buy .......currency name & Sell ........currency name.
Please if possible I kindly request you sir to suggest me in buy sell manner as it get simple for me to understand.
Take health care and thanks.
With regards,
Vanita
2y
Stephen Pope Stephen Pope
What I am suggesting is that if you are long USD but wish to hedge...as you think commodities may rise and thus drag USD lower one should cover the long USD position by selling USDCAD or USDAUD i.e. go long of CAD, AUD which are both driven by commodity price expectations.

If long EUR look to balance that i.e. hedge that by being long CHF DKK SEK or NOK

so sell EURCHF...EURDKK etc

If long JPY balance through buying AUDJPY etc
2y
vanita vanita
Thanks Steve.

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