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Why The Euro Is Going Much Lower, Or The Mother Of All Compression Trades

Submitted by Tyler Durden on 10/14/2011 07:42 -0400

While the euro has been gloriously soaring higher over the past nine days, to much pomp and circumstance, with the move now 3.2% on the week - the biggest 5 day gain since the beginning of the year, and European bureaucrats overeager to point out that there is no way the currency could be on the verge of implosion if it is in fact soaring, a far more quiet and stealthy move has occurred in the spread between French and German bunds, which just hit an all time record. Why is this important? Because as the chart below shows, the correlation between the two had been for all intents and purposes 1.000... until 5 days ago when it bexome -1.000. Which is a clear signal that the move in the EUR is now purely technical and on last fumes from the ongoing short squeeze long discussed on Zero Hedge (watch for the CFTC COT update at 3pm today for the plunge in net EUR short exposure); it is also a loud signal for a compression trade between the France-German bund spread and the EUR, and as such we encourage readers with a capacity to enact said compression trade to boldly go where no weak EUR short covering hands have dared go in the past 5 days.

h/t Fyodor

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Fri, 10/14/2011 - 07:44 | 1772823 Mongo

EUR.zip

Fri, 10/14/2011 - 07:45 | 1772825 GeneMarchbanks

French downgrade announcement in 3.. 2..

Fri, 10/14/2011 - 07:50 | 1772835 hondamikesd

That should be good for a 1000 pip bump in the Euro. Goddamn market has hit levels of post-modernism I never thought possible. Watch XLF tack on 10% when BAC and C report shit earnings next week.

Fri, 10/14/2011 - 08:06 | 1772859 GeneMarchbanks

I can take my shorts elsewhere. PPT buying shouldn't surprise anyone at this point in the game.

BTW, I read somewhere that "book cookin" index is at an all time high so... just FYI...

Fri, 10/14/2011 - 07:46 | 1772827 gmak

I;ll wait for GS to say to go long the EUR before I put on the trade. heh.

Fri, 10/14/2011 - 07:46 | 1772828 Irish66

EUO

Fri, 10/14/2011 - 07:48 | 1772831 achmachat

dudes! was this correlation common knowledge or do you have some serious AI looking through every possible pair on charts?

Fri, 10/14/2011 - 07:51 | 1772837 Socrate

One more 10+% plunge on CAC 40 to follow soon.

Fri, 10/14/2011 - 07:54 | 1772840 BeerGoggles

How do you go short euro, long bund. DO you put equal euro amounts into each one in an ETF or something?

On the futures, they move at different amounts.

Fri, 10/14/2011 - 07:58 | 1772847 abugarance

no chance in hell of any compression, spread going one way from here and euro the other...

Fri, 10/14/2011 - 08:15 | 1772877 Tyler Durden

So... France defaults as EURUSD hits infinity?

Fri, 10/14/2011 - 08:59 | 1772913 Mercury

You might do just as well and save a few ticket fees buy just shorting the EURUSD.

Wonder what the chances are that a desperate attempt is made to launch a Eurobond and/or yoke outstanding soverign European debts together, killing bund spreads and giving a sugar rush to the EUR.

Fri, 10/14/2011 - 09:11 | 1773043 RockyRacoon

Ain't no fixin' THIS.

Fri, 10/14/2011 - 09:23 | 1773096 Mercury

The figure for that country on the far left will certainly be coming down if they don't stop shooting themselves in the foot.

Fri, 10/14/2011 - 09:42 | 1773187 Max Hunter

So... France defaults as EURUSD hits infinity?

Sure as hell is looking that way..

Sun, 10/16/2011 - 05:00 | 1778479 falak pema

EurUSd will not hit infinity as Carla is waiting for baby. No default just foot fault. Anyways, nobody but the mad men want the dominoes to fall. We'll keep kicking the can, unless the can starts doing the can can in which case all bets are off and Iran becomes land of dopium under the shells of MIC hopium.

Fri, 10/14/2011 - 07:59 | 1772849 silver500

1 Bund contract is EUR100,000

Fri, 10/14/2011 - 08:04 | 1772858 BeerGoggles

Bund is EUR10 per bps, so a move from 130 to 131 = EUR1,000 profit/loss.

Euro is the same but the euro moves 180pips a day on average and bund only 130 bps. Would be easier if the chart showed percentages.

Fri, 10/14/2011 - 08:00 | 1772852 AngryGerman

Beyonce's fake baby belly was the biggest compression ever, biatchez!!!

Fri, 10/14/2011 - 08:05 | 1772860 msmith

I agree the Euro is going much lower after a move higher in the short term. The SPX looks to have one more push higher before a retracement unfolds. That view seems to be confirmed with a look at the EURUSD which appears to have another wave higher coming, while the DX has another wave lower to complete the wave structure. http://bit.ly/oGxxFl

Fri, 10/14/2011 - 08:21 | 1772893 HelluvaEngineer

I see a see saw zigzag move, count 13 of 57. Definitely bullish. Plus, you will find love in an unexpected place, soon.

Fri, 10/14/2011 - 08:05 | 1772861 LongSoupLine

Not to hyjack this thread, but the Wall Street protests just went Greek

Fri, 10/14/2011 - 08:07 | 1772862 AngryGerman

really? they fucking each other anally now? on the street?

Fri, 10/14/2011 - 08:46 | 1772949 spanish inquisition

Haha. Just got done cleaning up the coffee I spit up on the keyboard. Gotta love the classics.

Fri, 10/14/2011 - 08:53 | 1772967 GeneMarchbanks

Germans love anal. The males especially, so I've heard.

Fri, 10/14/2011 - 09:12 | 1773048 Schmuck Raker

So you have heard?

Ja ja, sure sure...

Sun, 10/16/2011 - 04:54 | 1778472 falak pema

Marshmallows to you with pickles. You r so banal.

You're bad genes are showing as your torn jeans play nut crackers suite. Not that I approve greek bashing like squid calamari.

Fri, 10/14/2011 - 08:09 | 1772866 SheepDog-One

Charts dont matter now, just carrot and stick rumors.

Fri, 10/14/2011 - 08:14 | 1772875 RobotTrader

GOOG up $39, AAPL up $9 pre-market

Same hookers chased over and over.

How many "tech bubbles" can you have in a decade? We've had 4 already.

Fri, 10/14/2011 - 08:33 | 1772920 Alvaro de Esteban

Five???

Fri, 10/14/2011 - 08:16 | 1772878 PulauHantu29

Shiller says this also, i.e., the euro will drop alot more and we will have a stronger dollar.

Of course, a stronger dollar means slower exports and choking off any further recovery which means even higher more painful unemployment.

The good news is for tourists hwo want to travel to the EU and but stuff cehaper. The bad news is crime is soaring in Europe now with over 300,000 unemployed, unskilled (and mostly Islam) refugees from North Africa and the ME.

Should be interesting.

Fri, 10/14/2011 - 08:16 | 1772880 RobotTrader

I bet that next week JPM will be trading higher than pre-earnings, and yesterday's beat down will be long forgotten.

Fri, 10/14/2011 - 08:27 | 1772907 gulf breeze

Your bank trades suck and you should be broke. post real trades here and the bear forum you fing bank janitor. when will you sell your hindsight trading service. It is the best I have seen.

Fri, 10/14/2011 - 08:31 | 1772914 SheepDog-One

Man, Robo paper trades the FUCK out of these markets!

Fri, 10/14/2011 - 08:19 | 1772887 Pullmyfinger

I would be very careful about confusing eurozone membership disruptions with the fate of the euro itself. Sit back and watch as the PiGS are carved off and northern Europe spontaneously emerges with a gold/oil backed euro in 2012. Hello euro; goodbye dollar.

Fri, 10/14/2011 - 08:26 | 1772902 SheepDog-One

A gold backed Euro? Yea well Im not holding my breath for that.

Fri, 10/14/2011 - 08:26 | 1772903 zedder

The Euro (against the dollar) hit a downward trendline (as part of a good looking channel) on the daily charts 2 days ago. Couldn't pierce it and the doji star was done on higher volume yesterday. A breakout trade just below yesterday's low could be the best way to trade this move today. The aussie versus US$ is in a similar pattern.

Fri, 10/14/2011 - 08:39 | 1772933 SheepDog-One

All fiats just bounce up and down against each other in a coordinated manipulation. We're printing and flooding the world with billions of new dollars and euros daily, yet they dont dilute down at all.

Fri, 10/14/2011 - 08:28 | 1772910 Wakanda

This sucka's goin' dooooown.

3 days until Black Monday II

Fri, 10/14/2011 - 08:28 | 1772911 Peter K

Mission accomplished, aye, aye Sir:)

Fri, 10/14/2011 - 08:43 | 1772939 SheepDog-One

All we're really doing here is marching in place waiting for this Iran war kickoff. Could very well be this weekend...anyone holding long over the 2 days? I wouldnt.

Fri, 10/14/2011 - 09:20 | 1773087 Schmuck Raker

"EZ Company, back to the barracks. The beaches of Normandy are socked-in with fog...NO JUMP TODAY. That is all."

Fri, 10/14/2011 - 08:44 | 1772945 gmak

Did a little quick analysis going back more than 27 days - and using the spread between the french 5yr and german 5 year (I don't know what the poster used). The GE - FR spread is negative (ie Bund yields are lower than French). There is a high correlation between the two (spread and EUR) - but it goes in waves. The only time that the correlation has been negative since October 2008 was the summer of 2009 and 2011. Right now, there is a high correlation between the two. but history shows that this will now decline to below 0/30, and possibly close to 0. Given that the correlation will be declining, the predictablility of EUR vs the spread will also decline - but there may be enough to put a trade onl. If the spread is going to widen (ie get more negative), then the EUR should decline as well. (I know that that is what the poster says, but isn't it nice to have a bit of confirmation based on more than 27 days?)

Note that the biggest moves in the EUR occurred when the spread was essentially flat ()which it has been more or less since around June 2010 until June 2011. There was also a flat sprad (more or less) from Oct 2009 to May 2010.

Right now, the correlation is 0.6186

Fri, 10/14/2011 - 08:46 | 1772948 zedder

Someone is seriously unloading their euro's. They are doing 5 and 10 pip sweeps on all dollar offers just after retail sales news. Last time I saw this was a few months ago after the same news. The UoM confidence survey must be nasty.

Fri, 10/14/2011 - 09:03 | 1773005 transition

SERIOUSLY ?

To sum up this ridiculous post : as EURUSD shot violently up, BUNDs and OATs went different directions for the 5 last days. So (the logic here must be crystal clear) EURUSD have to crash in two minutes.

Fri, 10/14/2011 - 09:13 | 1773055 maxw3st

#OccupyEURUSD, "The markets will remain irrational for longer than you can remain solvent"

Fri, 10/14/2011 - 09:19 | 1773078 hardball22

ZH always has their fingers on the pulse, but this chart suffers from a bit of selection bias. Tyler's absolutely right that the Correlation resides around +1 more often than not (depending on #periods, of course), yet we only have to turn to the close 9/27 & 9/29 or the opens of 10/3 & 10/4 to find correlation breakdowns like the ones displayed herein.

Compression trade, yes. Anomaly, no.

Fri, 10/14/2011 - 09:39 | 1773173 Schmuck Raker

I don't think the TPTB-PPT liked your post Tyler:

1.38540 + 0.00790 (+0.57%) Friday, Oct 14th, 2011 8:26A

Why The Euro Is Going Much Lower, Or The Mother Of All Compression Trades

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