Following yesterday’s EUR/USD decline many have questioned our conviction regarding the long EUR/USD trade we entered October 10. In short, we are sticking with this tactical trade into year-end.
Our initial motivation was the anticipation of a contrarian (i.e. EUR/USD favourable) move in short-term spreads.
From its October 6 nadir this spread move did occur lifting EUR/USD to its October 15 high before stalling on renewed Eurozone concerns. Thereafter however EUR/USD pressure resumed, most recently accentuated overnight by a seeming hawkish turn in the FOMC statement. Even so, we are reluctant to capitulate given recent correlations with US Treasury yields.
Indeed we view the strong negative EUR/USD correlation with UST10yr as instructive given their muted bearish reaction (and subsequent recovery) yesterday. Second, we note our expected positive correlation with short-rate spreads has been maintained.
In summary without a commensurate sell-off in Treasuries today, our analysis suggests the EUR/USD sell-off may be overdone.
**CA maintains a long EUR/USD from 1.2660 with a target at 1.31 and a stop of 1.2350.
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