Why do I think the EURUSD is a sell...??

Why do I think the EURUSD is a sell??

I do understand it is a non-consensus trade against all the big players of the FX market which their objectives vary between 1.25 and 1.30 for Q4, (yes, it could be the same situation as the beginning of 2017, when the majority thought we were going to parity in EURUSD….)

I also acknowledge the European economy has improved substantially in the last few years, due to the ultra-expansive monetary policy that the ECB has put in place at the beginning of 2015.

I also know that the American politics have strongly broken into the currency markets since Trump arrived to the White House, in order to counteract the American trade deficit with the rest of the world, especially with China and Europe. Therefore the US needs a weak USD (in my opinion it may work in the short term but, I disagree this strategy will benefit the US in the long term considering we are in a global economy)

Despite these arguments, I think that the appreciation of 20% experienced by the EURUSD in the last year deserves more than a small correction.

As an example, I remember perfectly the day of the American elections and the victory of the always controversial Donald Trump. His victory was going to be a blow to the world markets and the USD would suffer like never before (the end of the world was coming!). Indeed the USD was heavily punished after knowing the election result, but little by little it recovered ground to finish the day above where it had begun!! 
The rest of the story is already well known, an USD Index rise of just over 7% in just two months (USDJPY + 17.25% from the lows, from 101 to 118 ...). At that time, I also argued that the spectacular rise in the USDJPY was unsustainable, against the opinion of the big banks with 125 objectives at that time.

We are in changing markets and what seems clear today, tomorrow is not so.

The arguments that support my view are the following:

1) Macro Data: Recent data shows a weakness of macroeconomics in the Eurozone. Compared to other periods, this time we have seen a bigger decrease in the Economic Surprise Index.

Citi Economic Surprise Index – Eurozone (white) Vx EURUSD (orange)

)      2) Positioning: Long speculative positions in euros are at historical highs. The market is much more long positioned than when the EURUSD traded close to 1.60 in 2008.

This position will suffer if EURUSD drops below important support levels (1.2210 and 1.2150) leading to close positions, profit taking by investors accelerating the downward move.

This type of adjustment takes time, so patience is needed. 

CFTC EUR Non Comercial net position (white) Vs EURUSD (orange)

     3) Reserve diversification: Much has been said during this year about the diversification of the Central Banks reserves (especially Asian CB) are doing buying EUR and selling USD. Surprisingly, the last report published by the IMF (COFER) with information from the last quarter of 2017, shows how the reserves in euros have grown much less than estimated (from 20.05% to 20.15%). The main reason comes from the appreciation experienced since last year, which means that the reserves are increasing only by valuation.

So one of the arguments by which the speculators have positioned themselves in favor of the Euro seems to have lost weight.

   4) Oil: EURUSD and Oil have a positive correlation (please see graph underneath), losing strength at the beginning of 2017 and correlating positively again from the second quarter. Recently, Saudi Arabia has communicated that they would like to see the price of oil around 100 USD per barrel. It seems that we have already forgotten the American fracking sector and its ability to increase the offer (one of the factors why the Saudies knocked down the price in 2014).

In my opinion the fundamentals of the oil are not supporting such high prices. 
The risk is that, in an intervened market as the “black gold” is, OPEC couuld cut the production further shooting the price up.
The consequences in the medium term would be negative for the global economy, questioning the monetary policy normalitation being carried out by central banks.

EURUSD Vs Oil daily chart

And, what about the USD??

     5) FED: The Federal Reserve is on its course of interest rates normalization. Market, as the dots, discount two more increases from here to the end of 2018. But if inflationary pressure increases, we should probably see an additional one, with an important impact in the USD.

US CPI inflation

More interesting to analyze is the decoupling between US and Germany rate differential. That correlation was clearly broken by mid 2017 after French elections.

Last time we had this situation, it took EURUSD 10 months to converge again with rates.

DEUSD10Y (whithe) Vs EURUSD (inverse/orange)

DEUSD2Y (whithe) Vs EURUSD (inverse/orange)

 5)      USD Repatriation: Tax reform in the US will lead to a repatriation of 3.5$Trn foreign earnings, part of these are in USD assets and other in different currencies, so we will start to see some FX hedging by companies in the next months.

     6) Technical Analisys: A close below 1.2330 will be a bearish signal. Levels to have an eye are 1.2210 and most important 1.2150. If both are broken, 1.19/1.20 could be easily seen without discarding 1.18ish.

 EURUSD Daily Chart

EURUSD Daily Ichimoku Chart. A close below the cloud (1.2240) would be a bearish

EURUSD Weekly chart. Upside move stopped near the 61.8% Fibonacci retracement with bearish divergence in the RSI

EURUSD Monthly Chart. A close above the 200MA (1.25 now) would be a bullish signal

All this analysis makes me think that we are close to a greater correction in the single currency. 

A risk to take into account will be the verbal declarations from American authorities if the USD appreciates so quick (only a remind to Trump and Mnuchin: DXY has seen a fall of 12% in little more than a year).

As I said, only a close above the high seen in January would change my vision.

Any comment will be welcome

Note: This analysis is a personal opinion based on my experience, not a professional signal service. For trading, you must base your decisions on your own criteria