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EUR Strength, More To Come

Submitted by Tyler Durden on 07/26/2010 17:38 -0400

From Nic Lenoir Of ICAP

Today was relatively unsavory. Ever since the market has switched back above 1,087 we have been increasingly convinced that we are most likely going to witness a proper market melt up in the next few weeks. We have already advertised that global liquidity has been running up as per our global liquidity chart. As such there is definitely all the money needed around to push financial assets' prices further up.

GBPJPY and EURJPY are very close to confirm key break outs to the upside. Should they it looks like the 9,090 support that I have been highlighting in the Nikkei will indeed have held and the upside potential is fairly decent (at least 10% move up).

Looking further at liquidity the 3M Euribor/Libor regressed against EURUSD is particularly interesting. With the Fed's balance sheet relatively stable since the beginning of the year and the ECB's balance sheet contraction following the expiry of LTOR in June, funding games are increasingly going to be the drivers of currency markets in a worldwide game of musical funding chairs. Sure enough with the European crisis and on the heels of the end of QE 1.0 in the US, April through the end of May saw 3M libor rise sharply. As it became increasingly interesting to play the currency arbitrage Euribor started moving higher shortly thereafter which is going to be exacerbated if liquidity keeps being drained by the ECB which so far sterilizes its QE. As we said above, the best summary of the situation lies in the comparison of the Euribor-Libor spread with the EURUSD currency FX pair. Since last summer the two have moved in tandem. In the present case the rate spread indicates that EURUSD could possibly move all the way past 1.40. Surely if a melt up/risk on environment is here with us to stay for the next few weeks it would totally reinforce the fact that EURUSD is mispriced and can run up to 1.40. For traders who are not willing to take beta exposure, it is possible to express the view by selling the Eurodollar/Euribor September spread and buying EURUSD. The mispricing seems to be 15bps or at least 8% based on which space you consider it.

Keep an eye on GBPJPY and EURJPY for further confirmation out of Japan of the break out. If Japanese traders get back on the carry wagon in full force then surely melt up it will be as there is plenty of cash floating waiting to be allocated in the land of the rising QE.

Good luck trading,

Nic

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Mon, 07/26/2010 - 17:45 | 489223 plocequ1

In other words, the name of the website will be known as Infinity non- Hedge.

Mon, 07/26/2010 - 17:56 | 489241 traderjoe

The Germans are far too happy with a weak Euro to allow it appreciate too much. They will play with fire a bit and try to talk down the Euro/EU/European guarantees. Perhaps the Hungarian/IMF row can be used to sow just a few seeds of doubt...and push the Euro down.

While I appreciate the impact the crosses have on SPY, trading the back and forth of dying toilet paper money is just too much about the timing and order of the collapse. Obviously can be lucrative though...

Mon, 07/26/2010 - 18:29 | 489281 walküre

China wants a stronger EUR to sell their stuff to Europe, especially Germany.

I'm sensing the US is getting cut out of the deal that China and Germany got going. China has no problem buying Bunds for example when they know that German's are credit worthy and have some sort of austerity plan. Germans don't have the debt problems that the US consumers have.

Mon, 07/26/2010 - 18:10 | 489248 Pamela Anderson

If EUR continues to go up GLD is going to be killed.

Mon, 07/26/2010 - 18:06 | 489253 bebasvemir

Bottom in sight...

Mon, 07/26/2010 - 18:11 | 489260 Econolingus

If the Nikkei sees support at 9090, how would one play the upside for that index? An ETF like IJP? Or something else?

Mon, 07/26/2010 - 18:24 | 489273 walküre

German business outlook is very optimistic, maybe euphoric.

The party continues.... BUT euphoria is typically followed by a crash of some sort.

Germany's growth is linked 100% to China's appetite for "Made in Germany".

China can afford the luxury based on recent massive credit expansion.

That is ending and so will their appetite for the latest BMW or Mercedes.

Mon, 07/26/2010 - 19:51 | 489380 virgilcaine

Eur has to get above 130 before it can go higher. 140 sounds a bit much.

Mon, 07/26/2010 - 19:51 | 489383 toros

The long AUD/JPY short ESU10 trade looks ripe. Whatever happened to the panic over the Greek/German spread?

Mon, 07/26/2010 - 19:51 | 489384 Smiddywesson

I don't know squat about currencies next to you TD, but I can't help but think all this fundamental stuff means nothing. The central bankers of the world are playing for time. Just as most people on this site think the central bankers are manipulating the stock markets at their whim, I think they are collectively manipulate their currencies.

The central banks in Europe and the US are playing a game of tag, today your currency is rising, tomorrow my currency is rising. It's the same game they are playing with the major stock indices, trading in a range and desperately hoping time will show them a rip in the tuna net for all the nice little bankers to scoot away to safety.

This game of tag with the currencies and the ramp job in the markets is all about time. I don't think the Euro will rally forever. They need the stock market to take off before the USD runs out of airspace, and the USD is about to hit the tarmac, so this little round of Pump the Markets is about to run out of time and reverse. The dollar will rally, the Euro will fall, and the market rally will retrace.

Rinse and repeat until the spirit of The Great Economist, John Maynard Keynes, rises out of the most sincere of pumpkin patches to reward the all the good little economists of the world.

Mon, 07/26/2010 - 20:39 | 489444 L

Whom one must trust?

Mon, 07/26/2010 - 20:43 | 489451 Goldenballs

Oneself

Mon, 07/26/2010 - 21:29 | 489523 Bruce Krasting

I agree with Nick. The Euro looks like a breakout to the topside. If it breaks 1.30 tonight get a seat belt on. This is the ultimate fuck you market. What looks obvious, blows up. Think of Hedry and J Taylor and a million others. They have stop losses too. Everyone gets flushed out.

FX is a tough game to play. The great part about it is that it is a zero sum game. So every big player is out to slit the throat of every other big player. And everyone at the "table" has 20% action on the results. Blood sport. Monster numbers.

Mon, 07/26/2010 - 23:55 | 489665 RoRoTrader

Why tonight? What is the signifgance of tonight?

It is just over the 1.30 mark at 10:30 EST........sort of looking/feeling like a redux of 2009........a certain mix of confusion crossed with disbelief (as in how can anyone believe the test results - every bank passed, even the flunkies.......the Euorpeans are drinking holy water)

Same story line as last summer; why is the market continuing to rise???

Gotta love it even when it has the knife to your throat, or your balls and taking your money! And what a mind fuk.........or as Joubert said when asked about the difficulty of being an assassin - it is simple, I have no religion or political belief to subscribe too, neither capitalism or communism, I can work for both sides (long or short), I need only believe in the accuracy of my own precision.........too bad Darwin wasn't around to write about it.

I guess my question is beyond anything is possible, nothing impossible what in a few sentences will take it to 1.40 other than the dictates of the CBs?.........and maybe the answer is exactly no deeper than that........or from a practical standpoint, if the Chinese are buying Euros and sopping up sovereign debt then whatever, since EZ is China's largest and closest export mkt........love the one you're with.

How do we say BavarinMotoWorks in Mandarin?

I can see 1.3320 as a next target on a weekly chart which coinsides conveniently with outstanding candles for 05/01/10, 05/16/09, 01/03/09, 11/29/08, 10/18/08, 09/27/08, and other sig S/R levels back through 08, 07 and as far back as 04.

Stochastics are in OB on a W, but RSI can climb and when price runs technicals lose relevance anyway.

What's your take on EUR/CHF, Bruce? Any rethinks since your last short call?

Mon, 07/26/2010 - 23:49 | 489719 Pamela Anderson

John "Mr. FX" Taylor on June 28:

"We are scary, scary owners of euros,” , “We are keeping our fingers crossed that maybe the euro’s appreciation lasts through July and into August. But then the euro is just going to get crushed as it’s an impossible situation in Europe.”

“The period we are in now is the euro’s swan song,” said FX’s Taylor. The EU’s bailout package is making “people think things are OK and maybe all will be alright. When the reality hits us in September it will be miserable. I expect the euro to go to $1 by the end of the year."

Mon, 07/26/2010 - 21:42 | 489547 chump666

man ICAP...

1.40? i hope their longs get decimated like GS when they bet 1.30 when it went south.

lose money on this dudes advice

Tue, 07/27/2010 - 01:28 | 489701 RoRoTrader

you vill learn the meaning of becoming alter boys........bend over! that goes for the rest of you heritics too! get in line bitches.

hahaha!

Mon, 07/26/2010 - 21:59 | 489583 TimmyM

I don't buy it. The charts are FUBAR by CB intervention. Europe is the most insolvent developed area. CB intervention works until it doesn't. The natural primary trend is still risk-off. When this reinserts itself the force will be with you. Feel the force.

Mon, 07/26/2010 - 23:31 | 489705 RoRoTrader

i don't buy it either but who cares.......if you're trading all that matters is being on the right side of the price.......the rest is all too fucked up to unravel.

Mon, 07/26/2010 - 22:19 | 489621 Smiddywesson

Divide your cash into three accounts.

The long term outlook is bearish, so go short and ignore everything.

The short term outlook is month long swings in whatever Ben happens to be doing

The day trade is simple, fade the gap, or jump out and reverse if the trend survives lunchtime volume.

These markets have no rhyme or reason. Resistance is futile.

Mon, 07/26/2010 - 22:25 | 489634 Smiddywesson

Take a position that is small enough that they can't shake you out, and then sink your teeth into their flanks. This market only has one ending and you can guess where that will be.

A: A renaissance of corporate profits

B: The usual just deserts of a society that has become corrupt because of it's success.

I'm betting on the latter. If you position size properly, they can't shake you out. There's nothing in the trader's handbook that says you have to put all your money on one position trade and then bitch and moan about market manipulation. You are in control.

Mon, 07/26/2010 - 23:56 | 489721 RoRoTrader

Here's a question for Nic; what is your global liquidity chart? Can you put it into a context for those who don't have/don't know about global liquidity charts?

And, if you're putting it upfront (as you clearly are in your primary prop for a 1.40 Euro and higher equities) as a leading indicator for price direction then the obvious question becomes where did the liquidity come from in the fisrt place - selling maybe? - and if so then selling resulting in liquidity must have HIT a BIG HIGH on the liquidity index before other indexes hit the corresponding lows, correct?

Fuel for the fire, to put it in several words.

You and Bruce have some weight to throw around, and it's not that I don't love you both but questions rule.

Tue, 07/27/2010 - 00:21 | 489737 RoRoTrader

Let me put it this way; doubt exits because this is an extraordinary market situation (Euoropean bank failure) so the usual metrics (fundamental and technical) no longer have validity until there there is a kind of psychological balance re-established in the markets where the CBs will allow the usual day to day trading to resume.

Not unlike the Cuckoo's Nest scenario where the patients must be sedated back into the altered reality.

I think that sums up Nic's angst.........when confronted with the choices of the Roman Inquisition Galleleo seemed quite able to abandon the reality of science for the dreams of religion.

Tue, 07/27/2010 - 00:19 | 489746 DoctoRx

Zero sum games such as social bridge are fun.

Thus as an American, my main reason to participate in currencies is to hedge against the mismanagement of Federal finances-in other words to get a sort of "win" out of our mess. Since the euro is not an alternative anymore as it's got so many warts, the euro-USD cross is spectator sport for me. As sport, it's great fun, however.

Tue, 07/27/2010 - 00:46 | 489754 chump666

there is another icap analyst from another neck of the woods. guy is so bullish...like he is on a perpetual white line.

the eur has a downside cap at 1.20 (that's CB butnuts holding the line). the stress tests don't mean s$$$, the deal is the liquidity issues within the ECB, interbank rates and the EU banks. europeans are kickarse at arguing and revealing flaws...they are doing this right now on the post mortem stress tests. it will blow out spreads again and knock the eur back into reality.

so 1.40...is a hopeless long pos.

Tue, 07/27/2010 - 01:36 | 489769 RoRoTrader

I'll ask again; why not share the insights of the Global Liquidity Index/Chart?........and who runs that exactly?

Tue, 07/27/2010 - 00:49 | 489758 daggerwolf22

scary holders of euro..someone noted that ..and its accurately true.

euro either has to weaken or europe is dure to long period of deflation and sovereign state kaboom..beeing greek i sincerely cant see this whole thing going on without a)exciting euro back to drachma or b) nord euro/sud euro.from these 2 perpectives a is more visual .when?dont know but this fall will be a lousy mess here with all consequenses to euro maybe itll show us a path of things to come...one things for sure for med states this cant go on....

Tue, 07/27/2010 - 03:45 | 489810 Tic tock

RoRo, where do you think the liquidity is coming from- who creates it? ..cheap credit, the sumthin fer nuthin' consumer engine of the world and its affiliated franschises.

Tue, 07/27/2010 - 08:14 | 489885 RoRoTrader

Sorry I asked, but when I don't know I ask. That is the point. I've been trading for 6 years and the Liquidity chart is something I haven't seen before as an indicator.

Obviously Nic is using the liquidity chart as a primary indicator. Fill me in Tic toc, I am all ears.

Tue, 07/27/2010 - 07:51 | 489908 Eric Cartman