Something changed in the FX market after QEternity was announced. As CitiFX notes, active traders in the EURUSD market had generally behaved as trend-followers throughout the summer - in the lead up to QE3; but in the last few weeks, that pattern has changed dramatically. The heavy selling of EUR which took our positioning indicator from a record high in mid-September to negative territory came despite resilience in spot. Thus investors now appear more inclined to sell into strength from EUR. This could reflect frustration with EUR’s inability to sustain breaks beyond recent ranges and desire among investors to lock in gains among longs. Combine this positioning with the fact that EURUSD is trading over 300 pips rich to its swap-spread-implied fair-value and perhaps trading the range - as opposed to looking for breakouts - is a better bias currently.
CitiFX Positioning vs EURUSD...
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EURUSD vs Swap-Spread-Implied 'fair' value...
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and the implications for US equities are a drop from 1434 to between 1400 and 1360...
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