Forex Flash: Short EUR/USD targeting 1.2650, stop at 1.3310 - RBS

FXstreet.com (Barcelona) - EUR/USD has shown a clear divergence from RBS short-term fair value over the past month, as the relationship between rate spreads and EUR/USD has broken down over the past month, notes RBS strategist Brian Kim.

"We believe the divergence in EUR/USD and our fair value estimate may be related to both positioning and year-end flows" Brian comments. By looking at seasonal patterns since 1995, Brian observes that "EUR tends to be among the stronger performers in December but is among the worst January performers, while the USD is the second strongest G10 currency in January..."

Another factor contributing to EUR/USD short recommendation by RBS is that the market appeared to remain very short of EUR as per CFTC data. "Since the net short EUR position has fallen dramatically and non-commercial positioning on the IMM in EUR contracts is now nearly flat, there is room for fresh EUR shorts to be established" Mr. Kim mentions.

RBS expects "increased funding pressure on Spain during the New Year, a rate cut by the ECB, and, potentially, a renewed US fiscal debate over the fiscal cliff to result in a decline in EUR/USD in the near-term, putting the pair better in line with its fundamental drivers" Kim says.

RBS puts now on a EUR/USD exposure at 1.3065, target at 1.2650, with a stop-loss above 1.3310 after its double failure, "a level which has acted as resistance twice in the past month and may have formed a double top" Kim adds.

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