at the end of 2004, while oil price rising further might reach a level where its historical highly negative correlation with the USDturns positive as it does when oil price rise enough to break the back of the macro up cycle.
more if you are Greek). Yields spreads remain favorable and in synch (which is even more important) but the spread momentumhas been faltering in the past 2 weeks despite M. Trichet
"strong vigilance".Sentiment is not supportive with Speculators having accumulated a large net long position and a short-term positive risk reversal divergence
The Euro has been supported by the strong growth in emerging markets and the rapid inflows of hot money
. Indeedexports to emerging markets are contributing strongly to the recent performance of the European core area and Emergingentra an s are usy re a anc ng t e r currency o ng towar greater vers cat on even t ey not t ey wou ave tosell some USD to keep the mix stable). We should also remember that a big chunk of emerging markets credit expansion is andhas been financed by European banks. So
if emerging markets slow down is larger than most expect (our scenario) Europeand the Euro are likely to suffer much more than the US and its currency.
trend is up
but extended. We would exit long positions at least until we get an upside break. We would sell 1.5-3% OTMcalls with 1-3 months maturity and would start to build an outright short position on a move below 1.39 and increase it if itmoves below 1.375. We would use an initial stop at the high the Euro will make before it move below our trigger zone (so not1.4248 but higher or lower depending where the current intraday rebounds stop).
Longer-term we maintain that the Euro could fall below 1
. We think that it will bottom near 0.7 if it survives. Crazy? We metthe same skepticism when we forecasted a rise above 1.5 when the ECB started to intervene when it was hovering near 0.85almost 10 years ago. While supportive political decisions might be taken in the near future (but it seems they won't as is usual) ,
Clue6 Second Quarter 2011
e pro ems won sappear an w come ac a er o un em.
e sys em, o po ca an nanc a as o ereformed but we will probably need a new crisis.