Podcasting The Charts That Matter Next Week: The Continuing Case For A Weaker EUR

Tyler Durden's picture

Over the past x months, one thing has become all too clear in FX land: the EURUSD must stay rangebound between 1.40 and 1.50, even though as Goldman's John Noyce presents in his latest "not-for-retail" packet, the fair value of the European currency continues to be higher than where it should be. Whether this is a simple case of the tail wagging the dog, whereby the ECB and China are terrified of the downstream effects should the European currency trade under the psychological barrier of 1.40, is unclear. What is clear is that every country in the world has skin in the game, and is forced to keep the EUR in Goldilock rangebound territory: not too low to spook European investors, and not too high to accelerate the German double dip. Some other risk assets correlations observed include the AUD vs 2 year swap spread basket, the VIX vs the S&P, and lastly, on the until recently massively overstretched CHF. Noyce tops it off with some technical perspectives on US govvies and the 2s10s, which is once again diving, although unclear if due to a bullish or bearish flattening.

Attached is the full podcast with notes and the accompanying presentation below:

Noyce 8.27 by user5452365

Lower Lows in the EURUSD:

While it’s difficult to draw the recent EURUSD consolidation as a classic triangle pattern (the highs/lows cannot be joined to form clear trend lines) the market is certainly in a well defined contracting range - a long series of lower-highs (from the 4th May high at 1.4940 onwards) and an, albeit shorter, series of higher-lows (from the 12th July low at 1.3837 onwards) being evident


As discussed in numerous recent written updates and client meetings the idea of another sustained uptrend in EURUSD seems very difficult to rationalise based both on the pure technical setup on the longer-term charts and also due to the correlated asset market backdrop.


From a MT-LT (multi-week/-month) perspective this leaves a bias that a sustained downtrend is more likely to develop at some point than a material and importantly sustained uptrend.


However, even with the above in mind, based on the simple daily chart a break of the recent chain of lower-highs and higher-lows, i.e. a classic range break, would at this point likely generate a quick flurry of “breakout trade” interest regardless of the direction of that eventual move.


The pivots to confirm an upside or downside break look to be the interim high from 27th July at 1.4537 and the interim low from 19th August at 1.4258 respectively.

EUR Overvaluation based on German-USD 2,5,10 curve correlations.

On the chart above the green line shows the performance of an equally weighted basket of the 2-, 5- and 10-year Germany/U.S. yield spreads and blue is EURUSD spot. As can be seen, from June last year until early-July the two were quite highly positively correlated. Since then the two have diverged and at this point the spread basket argues that EURUSD should be around 6 or 7 big figures lower than it currently is. The question however, as pointed out by clients in a number of meetings recently, is whether this discrepancy is currently due to a “safe haven premium” bid built into German fixed income markets.

AUD is likewise overvalued:

The one issue with the chart shown opposite ,which has been highlighted by a number of clients, is that there is now a good rationale to argue that a “discount” is being priced into the USD due to specific “U.S./USD issues” which is not necessarily reflected in the other asset markets. The chart above attempts to “control” for that potential issue. It instead overlays our AUD/Broad Index(*) with the related 2-year swap spread basket (i.e. AUD 2-year swaps less an equally weighted basket of the 2-year swaps for the other “Old World G10” currencies). Here too there is a significant “valuation gap”, with AUD not falling to the same degree as the spread basket since the start of this year.

Recent moves in VIX and true risk:

The high on the VIX earlier this month was set at 48.00, very slightly below the highs of the historic range (excluding Q4’08/Q1’09) which was set at 48.20-49.53

  • As previously highlighted, historically once the VIX has moved into that 48.20-49.53 region the S&P has tended to enter either a material period of consolidation/correction or the early stages of a material uptrend.
  • With this in mind some further volatile, but range-bound, consolidation on asset markets is possible.
  • Just as something to keep in mind, ..if.. asset markets begin to weaken again and the VIX pushes above the old pivot centred on 48.20-49.53 it would be a warning of a significant deterioration in outlook as on our data this only happened to a material degree in Q4’08.

And, perhaps, most importantly, the technicals of the 2s10s.

  • The recent bounce in yields has been focussed on the longer-end of the curve hence the 10s/2s spread has steepened over recent sessions (following the sharp flattening of the last few weeks).
  • For now this move could be viewed as a re-test of the neckline of the multi-year double topping pattern formed by the October ‘10 low at 204bps 10s over 2s. As long as the market doesn’t make a weekly close materially back above this prior cycle extreme the eventual risks still look skewed towards a flatter curve from a multi-month perspective (with an ultimate target of 123bps 10s over 2s).
  • From an FX perspective a flattening curve is often viewed as a USD positive (material flattening trends over recent years have tended to be driven by higher short-end rates), however if this is a bullish flattening driven by lower long-end rates as seems more likely the FX implications are less clear.

And much more in the full presentation below.

CTMN 2011-08-25

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unky's picture

Well, they obviously killed another high ranked terrorist. Lets expect a sell-off in gold and silver on sunday night again...



Judge Holden's picture

"Well, they obviously killed another high ranked terrorist."

I'm expecting them to quietly backtrack on this and mention that they did not in fact kill him, as they have done several dozen times in the past.  The AP article I read announcing the story was dripping with propaganda.  For example, it said, "He once served as bin Laden's personal emissary to Iran. Al-Rahman was allowed to move freely in and out of Iran as part of that arrangement and has been operating out of Waziristan for some time, officials have said" which strongly implies that AQ and Iran were working together.  Which is, of course, ridiculous, as AQ and Iran are mortal enemies.


As an aside, I wonder if the "#2 in command" is the new "#3 in command" in that the government will announce ever 12 months or so that they have killed/captured AQ's #2 leader.  http://thelede.blogs.nytimes.com/2010/06/01/eliminating-al-qaedas-no-3-a...

Tompooz's picture

Number 3 or number whatever--it could well be that Lybians in al Qaida are now on a high-priority list for drone-assassination. Can't have them pop up in Lybia at this time.

Judge Holden's picture

The claim (by the govt) was never that he was "#2 (or #3) on the US's high priority list."  The claim was that he was "#2 in the al qaeda command structure."  It's pretty common for governments at war to inflate the importance of foes they've defeated, it's good for morale.  Hence, that's why the constantly claimed to have killed/captured "AQ's #3" several times in the past.

Durchbruch's picture

Could it be a lack of euros ? EU Financial institutions are getting rid of their overseas assets because they need money. All the piigs are in a deep deflation, not seen on the news by now, but I see it on the street

eurusdog's picture

Thanks Tyler, I was waiting for your take on the ECB types speech!

LookingWithAmazement's picture

Euro still hasn't collapsed. Will not happen, either. Boring world we live in.

speconomist's picture

Considering that this is from Goldman who else is joining me in taking the opposite advice?

unununium's picture

> not-for-retail

Doesn't that just about sum it up right there?  Who on God's green Earth would trust these vermin?  To the institutional clients, are you so naive as to think there is no "not-for-institutional?"

These privileged takers of freshly printed money serve the inner-circle masters above all.


buzzsaw99's picture

This explains the EURUSD situation:


The Euro has not yet passed the event horizon whereas spaceship commander bernank has had the engines in overdrive thrusting toward the center of nonexistence for years. Time will tell if everyone else will follow him pell-mell into oblivion or not.

flyr1710's picture

'risk off' anyone?

Lionhead's picture

I would take GS advice with a grain of salt. Now, for one chart you better remember when the day cometh:


This is where the rubber meets the road.

oldmanagain's picture

I guess I am old school.  Interest rates count in currency trading.  Euro rates holdling up euros.  Plus, who says Europe is worse off than the US.

My hunch however is the world currencies may see another wild period  where sound wave patterns dominate much like 08 and 09.


Eventually producers of resources such as oil and gold will not sell all they produce. Then be confiscated.

valuetrader's picture

What total and utter nonsense from GS. I don't think that looking at charts is what one needs here. Let's look at the fundamentals, politics and CB's actions to make sense of the whole mess. Both the US and Europe are in trouble with too much debt and too little growth. Governments are struggling to maintains status quo and support a standard of living that cannot be supported by the economies. One way to do this is to weaken the currency and all government institutions in the US are hard at work debasing the greenback. The contrast with Europe is significant with European institutions fighting to preserve that value of the EUR. Nobody knows if they will succeed but they are trying while the US is trying to devalue. This is a big reason why the EUR is doing well. Let's look at some details:

1. ECB hiked rates and O/N is now 1.5% which compares well with the FED zero rate to 2013 policy. If you trade FX, you would know that interest rate differentials are very important for FX rates. Clearly the ECB is trying to preserve the value of the EUR and fight inflation in Europe.

2. European government are implementing fiscal austerity. We are seeing governments putting some sort of balanced budget laws in the constitution. The Germans are pushing their free spending southern friends to tighten their belts. This contrasts with the more lax policies in Washington and Keynesian approaches to solving the economic problems in the US.

3. At least some economies in Europe have restructured already and are in much better position to compete internationally - most notably Germany.

These are the strong points for the EUR but of course we have many negative ones as well - total mess with the PIIGS, ECB buying PIIGS bonds and funding weak European banks (and this maybe all European banks, more or less). This is QE, if I even saw one. Politically, both the US are Europe are a mess. Politicians are fighting hard to position themselves for the next elections and would offer their electorate the most outrageous circus to win and preserve their power/money.

So, which one will it be, stronger dollar or euro. This is likely to be a race to the bottom and the outcome is not certain but my opinion is that the EUR is more likely to preserve its value. Both places will likely print more money but Europe is making an attempt to address its fiscal issues while the US is in a state of total denial. I think that policies in Washington are likely to change only if we have a severe currency crisis with the value of the $ collapsing.

There is one more reason why I think that the $ will have a hard time. This is the approximately $6 trillion in foreign hands. This money is a claim on US assets and I don't imagine that anybody in the US ever plans to offer any assets for this paper. Also, the US continues to run a substantial current account deficit of 3.5% of GDP and this will keep the dollar weak. The US is likely to substantially debase the dollar to meet these foreign claims on its hard assets. Europe in contrast doesn't have a large current account deficit - another plus for the EUR. 

My guess is that if the EUR survives, it will do better than the $. It will be even stronger if some of the PIIGS get kicked out with Greece now the most likely candidate. On the other hand, if Germany leaves the EUR, then we know what will happen to the EUR. For some reason, they want to stay in the EUR.

This seems to be the view of the market as well. Look at the performance of the EUR at the time when Italy and Spain were on fire (perhaps they are still on fire). The EUR hardly weakened vs. the $. Most of Wall Street has been calling for a lower EUR/USD which maybe a good indicator that the opposite will happen, given the quality of their research.

janus's picture

Mr. Durden,

Thanks for that and the piece by Grant (i think it was grant...maybe graham) last night.  i was more than a little dumbfounded after watching that video from TED about the algos -- should be required viewing for every single american.  for Christ's sake, they've built a massive fiber optics cable from chicago to ny for the express purpose of ripping off their fellow citizens in 13.5 micro seconds less time...and i think to myself, what a wonderful world.  crazier still is the fact that the algo charts you've shown us of late make those he displayed seem tame and cute. in the end, there's really no escaping the conclusion that these swine-fucking bastards must die -- the ground below thirsts for their blood, and the hell beneath that lusts after their wretched souls. 

nevertheless, the subject is technicals and chart forecasting, so i'll focus my attention on that for the time being.  i pay a rediculous amount of attention to some of the things you post; and so i tend to linger for long spells on things till they start to fit with my understanding.  and so there i was, brooding like all get out over the chart on page 13, and it hit me: this (Broad/CHF index) is the flashing red alert, as it clearly shows a massive accumulation of unfettered panic on the part of institutionals and smart-sorts; perhaps correlate this with similar trends viz. gold and, say, treasuries (or whatever, i'm just throwing that out there) and their fluxuation in the world's central banks (those not pegged to the dollar, mind you; and with floating currencies, of course) in the same time period and you will see a giant schvincter shrinking all at once, all across the globe.  moreover, considering china's unique circumstance, i don't think their boisterous appetite for UST is contrary to the overall trend, i see it as part and parcel to it -- in fact, it should accelerate with everything else...along with volitility -- right after labor day...maybe sooner.

happy hunting.

tally ho,


hungrydweller's picture

Was he speaking English?

hungrydweller's picture

Euro sucks.  Dollar sucks.  Yuan not convertible.  Got GOLD!

mynhair's picture

I am so sick of the 2-10-30 butterfly.  I now kill butterflies.

Worms to be, they be.

janus's picture

me and Alf just gobbled up your lil kitty.  tastes like rabbit.

what is this 2 10 30 thing you speak of?

janus's picture

sorry to trouble you with a stupid question...i'm embarrased.  committing all the acronyms, trade talk, strange abbreviations, ect. to a functioning mental register has been the most difficult and confusing aspect to all of this. 

in a sense, this is like another profession; in that, when one hears clip-clopping it's most likely not a zebra. 

but, yes, i agree -- the 2/10 spread (twist) would destroy this nation if a thousand other things weren't ahead of it in line.

thanks again,


FeralSerf's picture

How to make the kitty taste like chicken:


janus's picture

sautee with great big gobs of greasy-grimy-gopher-guts; season liberally with MSG; deep fry in hog fat; and, voila!

pollo muy bueno de gato

goes well with a nice dry white

Tompooz's picture

Oh, to be a chicken in New Zealand! Alas, it all ends at the next stop on the food chain.

Ramboy's picture

Euro and Dollar is from the same kosher printblock.  In fact, they are second cousins.

Lord Peter Pipsqueak's picture

FX market is discounting the ejection of weaker PIIGS and the fact the ECB banks have shitloads of gold in reserves,my money is on a breakout of EUR/$ and EUR/GBP to much higher levels.

sqz's picture

Too early to start discounting Euro restructuring, this may start to be priced in depending on important German legal and political announcements during the critical month of September.

Jovil's picture

Living through a currency devaluation and how to cope

I was managing an American subsidiary of a successful large US Company in Mexico. It had been a financial turnaround for our team. Cash flow had accumulated in our bank in Mexico and corporate didn’t want the money repatriated to the US. Although we had already paid a 35% income tax to the Mexican government, we would have to pay an additional 30% exit tax to repatriate the money. In addition, we would have to pay high fees for the peso/dollar exchange, in order to make the transfer. The company wanted to expand our successful business and so we decided to keep the money in Mexican pesos to be used for further expansion.


One morning, as my wife and I were on a trip driving on the highway, we heard a national message from the President of Mexico in 1976, Luis Echevarria, one of the most corrupt presidents in Mexican history. “It is a lie that we are going to devalue the peso,” he said.

Read more



RobotTrader's picture



FXE looks pretty strong to me.

They have had plenty of chances ot knock it down the last month, each time failed.

UUP tried breaking out on Friday, but it failed.  What a mess.

scratch_and_sniff's picture

Its being held up, no doubt, i dont care though because it just makes trading it all the more easier. No matter how strong the selling was these past few weeks, someone was there putting their balls on the table soaking up everything. I have a feeling the shorts might be close to calling it a day soon, it's been weeks now and im pretty sure they are running out of ammo(or the will to live). This friday should call it, one way or another.

kaiten's picture

Everyone´s pushing EUR(oil) down, so that QE3 can be launched, finally.

Perpetual Burn's picture

No clue what the guy was saying...

Yen Cross's picture


tim73's picture

Optimal value for German exporters is about 1.2 and ECB is NOT trying to keep the 1.40-1.50, it is the pure MARKET FORCES at play. That shows how strong euro really is despite continuing downtalk from Yanks and Brits.

7bit's picture

Spurious Regression (look it up if you never heard about it) is the first word that comes to my mind whenever I see these kind of amateurish attempts to overlay two charts and then draw any conclusions from it about where is A is "supposed" to be based on the price of B. Just expand these chart overlays a little bit to the left and watch how quickly your "relationship" dissolves into meaninglessness. Or try to trade the spread between such two not properly co-integrated instruments and burn your fingers if you prefer to learn this simple math lesson the hard way.


PulauHantu29's picture

For the euro to survive, one of two things must happen. Either the Germans (and the Dutch and Finns and French) decide to back the concept of some sort of eurobond financing of the balance sheets of the peripheral countries, OR there need to be massive write-downs of insolvent-country debt and the various countries need to backstop their banks, because bank losses will be massive.

The former needs buy-in from German voters. Polls show Germans are against the idea of eurobonds by something like 5-1 (75% against, 15% for).

Read more: http://www.businessinsider.com/its-the-end-of-the-world-part-1-2011-8#ixzz1WKsIrTLb

Tompooz's picture

I wonder what the voters will think of the latter option: massive bank losses, possible bank runs, taxpayer guarantees, utimately the break-up of the Eurozone..?

They are facing a fundamental choice for the medium term future of Europe. The creation of a two-speed Eurozone is an option. The German voters will be historically aware of what can happen when one zone is led by Germany (and the other by France.) :-(

After giving it a long thought, they may still seek refuge in further devolution of souvereignty to the EU.