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Andreas Zanin
Analysis | May 11, 2021

KTM FX Weekly: Waiting for the next catalyst which moves the EUR higher

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EUR elevated last Friday on poor April Non-Farm payrolls, well stationed above 1.2150. Besides U.S. dollar took a hit on Friday but lacked follow-up selling on Monday. A more exciting factor post-NFP is higher yields on Friday and Monday too.

Even though the US April Nonfarm payroll data spread way below the estimates of 1M, higher yields are the most exciting move.

  • Danske Bank said, “We are still more upbeat on the labor market recovery than the Fed and still expect the Fed to move in a more hawkish direction in September. Actual tapering is likely to begin in January 2022.”
  • Paul Donovan at UBS said, “Last Friday’s U.S. employment report disappointed. Details confirmed the shift in spending patterns to favor service sector employment. People want to have fun; letting people have fun is hard work, requiring more staff. The data may under-report reality, with the surge in new retail and leisure businesses unlikely to be captured.”

As we noted in our last week’s article, historically, 13 times, the dollar index has outperformed in May with an average of 0.60%. Besides, the EUR was down in May, 15 times out of 26 years against the dollar. Looking at the positioning, the F.X. market positioning still suggests traders continue to add bearish USD positions.

  • ING: All G10 currencies except sterling saw a net increase in speculative positioning against the U.S. dollar in the week ending May 4, a sign that USD bearish sentiment is rising again.

If you are a dollar bull, you will buy USD against CHF, CNH, and JPY, which favors the trend. Another side of the coin, buying AUD and NZD against the dollar, tends the risk-reward ratio. Our subject currency EUR has to settle above 1.2250 to aim at 1.2350 and 1.2400+.

Coming to the recovery cycle, U.S. is leading Europe in all parameters, and it is already priced in the yields. So, we are looking for a bright spot elsewhere to invest. Our conviction factor is higher in Europe as the recovery is still lagging to the U.S. and U.K. Based on this opinion, we forecast a higher German bund outperform the U.S. treasuries.

Overnight’s Sentix press release cited that, “The situation assessments in all regions continue to improve. With the exception of Latin America and Eastern Europe, we measure positive values everywhere. The Corona-related recession phase has ended.”

Money market:

Germany’s 10-year bund, the benchmark for the E.Z., has outperformed U.S. yields. Since the beginning of this year, both the results rallied, but U.S. yields peaked at 1.75% and now settled below 1.60%. At the same time, Bunds continue to shine with trading at YTD high. We witness a tactical pause on the yield’s strength, so bunds have an opportunity to outperform.

  • The Germany 10 Years Government Bond has a -0.206% yield.
  • The UST 10yr yield closed Monday at 1.63%, 3bps higher than Friday closing.

A taper tantrum is a next catalyst.

Who goes first? Bank of Canada is leading, followed by the Bank of England, in reducing the monthly bond purchases. Who’s next? ECB or Fed? 

Traders are already looking past the current recovery phase to tampering. Reduction of the monthly bond-buying program is a delicate task. Last time in October 2017, when the European Central Bank announced that it would cut monthly purchases from 35billion euros to 30billion euros, the EURUSD spike from 1.1500 to 1.2560 an 8% rally triggered, before the actual tampering started. Hence, ECB communication is the critical driver for the EURUSD from hereon. Anything after June 2021, we are expecting a pickup in the EUR momentum against the U.S. dollar.

Data review: 

“The Corona-related recession phase has ended,” according to Sentix.

The sentix situation index rises for the third time in a row to 6.3 points. The overall index reaches its highest value since March 2018.

Looking ahead, we will see ECB Monetary policy meeting accounts (Fri) Euro Zone’s March Industrial demand will be the key for the EUR this week. Besides, few Fed speakers (Tue) and U.S. inflation and retail sales are the catalysts for USD this week.

  • Westpac says, “The wounds inflicted on the “U.S. macro outperformance trade” are near-fatal and won’t be changed by this week’s April CPI and retail sales. Although the payrolls miss Fed tapering and policy lift-off, expectations have further to adjust before they look anything like the Fed’s guidance. That, and a Eurozone economy that is rebounding as reopenings and vaccinations gather pace should leave DXY on the backfoot through Q2.”

Looking ahead, we will see ECB Monetary policy meeting accounts (Fri) Euro Zone’s March Industrial demand will be the key for the EUR this week. Besides, few Fed speakers (Tue) and U.S. inflation and retail sales are the catalysts for USD this week.

  • Westpac says, “The wounds inflicted on the “U.S. macro outperformance trade” are near-fatal and won’t be changed by this week’s April CPI and retail sales. Although the payrolls miss Fed tapering and policy lift-off, expectations have further to adjust before they look anything like the Fed’s guidance. That, and a Eurozone economy that is rebounding as reopenings and vaccinations gather pace should leave DXY on the backfoot through Q2.”

TECHNICAL OVERVIEW

On the anticipation of future Europe recovery story which could outperform bunds over yields are the base case for our higher EUR in the coming months, probably 2H 2021.

However, looking at the technical picture, EURUSD’s benchmark moving averages 50 and 200MA are on the verge of making a death cross.

Death cross: Near-term moving average 50MA closed below the longer-term average of 200MA. Last time it was recorded in 2018 and 2013. We believe we are in 2013 and anticipate the final leg higher. 

Supports located at 1.2050 and 1.1980. If the price is moving higher for resistances, watch out at 1.2200 and 1.2250. If you are into the medium-term, then buy EUR on dips favor the trend with a target at 1.2350 and 1.2450. Repricing the European recovery momentum would support this view.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

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