Forex expert guest post: watching the Euro Bulls

In this guest post, Currensee welcomes Tim Mazanec, CMT.  Tim is a 14 year veteran of the foreign exchange and global markets.  His previous experience includes being the Senior Foreign Exchange Strategist at Investors Bank & Trust and a Global Markets Senior Researcher at State Street Bank.  He is also a regular commentator on Bloomberg TV, CNBC, CNN and other web-based channels and is often quoted in Bloomberg, China Business News, Dow Jones, Financial Times, Nikkei & Reuters.  Tim combines technical, fundamental and flow analysis to develop his forecasts and Forex trading decisions.

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Now that EUR/USD has popped back above 1.50 it seems that the Euro bulls are coming out and making their case for much higher levels.  We’re also reading stories on inflation worries, less than one week after the FOMC met and showed little concern on the inflation front!  Add in talk on China, the other engine of global growth, and how it is ready to rebound in 2010 and it makes you wonder what happened over the weekend!

Didn’t we just witness a similar situation a few weeks back where EUR/USD punctured through 1.50 only to dip back down below 1.47 a few days later.  It was at that time too that the Dow Jones eclipsed 10,000 for the n-teenth-time before dropping a few hundred points.  We all wish that the bulls had made their case at that time instead of hitting the mute button and taking a short holiday.

Before we ask why there has been a change in the market price let’s take a look at what traders are thinking on Monday.  The Social Indicators on Currensee show that traders are net Short EUR/USD.  In fact on a volume basis 86% are Short while on a pure positioning basis a majority or 56% (out of 123 traders) are short EUR/USD.  They are also short a few other Euro crosses such as EUR/GBP so more than a few are questioning the current run-up in risk-taking on Monday.

Why has 1.50 has been eclipsed again?  Can we cite the NFP report from last Friday that showed only a loss of 190k jobs in October.  From a bull's point of view layoffs are decreasing and the overall employment picture has improved.  Jobs were created in health care and education last month while temporary jobs, a forward looking indicator, were created too.  Still we’ve lost 7.3m jobs lost over the last 2 years and there was less than a 50k improvement in job creation when comparing the combined totals of September and October to that of July and August.  The latter the time of year when many are more concerned about their tans than their job hunt.  Combined that with a 10.2% unemployment rate had equity traders indecisive last Friday as well.

Can we cite the G-20?  Meetings between Finance Ministers from the largest industrialized nations usually turns into a case of ‘buy the rumor and selling the fact.’  Statements that they will stand by when necessary honestly does little to comfort investors any more, especially after the what we’ve endured during 2007/08.  Their view on the dollar is not going to change how a Portfolio Manager invests or a technician reads a chart.

So higher we go.  The Thomson Reuters IFR Squawk Box widget on Currensee stated, on Monday morning, that 1.5065 was the short-term target.  That is certainly a starting point but if this upward momentum lasts we’ll surge through that level in a hurry.  Of course it all depends on one’s time frame, day-traders are more concerned about the next 50 pips but understanding the general direction is helpful to us all.  EUR/USD is trading above all the key moving averages as well so placing targets is a matter of trying to figure out when momentum will exhaust itself.

Should you just go with the bulls for a bit or view this as another opportunity to sell?   The one thing missing this week is a reason to wait to trade.  There are no obstacles such as the NFP to wait for or the G-20 meeting.  The FOMC has come and gone and keeps suggesting that they will remain accommodating for a long time to come.  Even the economic calendar this week is very quiet.  There are no tier I or II economic releases until Thursday when we receive the latest weekly jobless claims.  Those even dropped by 20k last week suggesting an improved labor market.

Right now the best case for the bears may be that the exhausted momentum argument.  Risk-taking has had a great run since March but a correction is eminent, right?  Many who were lucky enough to buy stocks this spring will take some profits before year-end, especially those portfolio managers that are beating their mandated indices.  Others are reluctant to buy at such rich levels, especially if the growth in profits on a year-over-year basis in 2010 will decrease as compared to corporate profits in 2009.  Back to the Thomson Reuters widgets, the IFR Squawk Box also showed on Monday that EUR/USD puts traded in the marketplace with January expire at 1.4050 (on significant size) so there are others that do agree with the majority of traders on Currensee that Euro will be lower in due time.

In the end the decision comes down to believing in the  latest wave of euphoria for risk-takers or expecting momentum to peter out as 2009 quickly comes to a close.  As always, it’s a battle of the bulls versus the bears.

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