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Foreign Exchange

FX research roundup: Euro positives even in the negatives

There’s no stopping the flood of above-consensus European data: just this morning IFO business sentiment is up to 106.2 from 101.8 when a small fall was expected; and UK GDP is reported up 1.1% on the quarter. The leaks about Committee of European Banking Supervisors (CEBS) stress tests – that Greece’s Ate bank and a few of Spanish cajas haven’t made the 6% tier 1 capital target – can also, perversely, be seen as positive, in that the tests get credibility (even if the banks that failed were ones that were expected to anyway). So it is a little surprising that research has arrived this morning calling for an end to the euro rally.


Stephen Hull in Morgan Stanley’s FX pulse believes: “The correction in EUR/USD from 1.19 to 1.30 is probably complete”. Hull reckons that the stress tests still have scope to disappoint, particularly in transparency and stringency; that there were positives in Bernanke’s testimony (a second round of quantitative easing is not at the top of the agenda); and that the world has not decoupled. “If the US recovery slows further, any slowdown is likely to come to eurozone shores shortly after,” says Hull. Though he didn’t know about the IFO number when the note was published.


In the same note Sophia Drossos believes that the euro correction is overdone. “Our proprietary framework for assessing the expected distribution of returns for the trade-weighted EUR is signalling a sharp increase in downside risks over the upcoming quarter,” she says. Which I think means that EUR will go down.


Meanwhile George Davis at RBC is also far from being a euro bull. His latest missive is nimbly called Lines in the sand. Technical summary: EUR/USD rally nearing an end? In it, Davis argues that the rally has become overbought and “stretched”. He sees good resistance between 1.3028/1.3113 and that a close below 1.2813 gives way to 1.2578 and 1.2438.


Indeed, there seems to be a battle going on among the technical guys. Ed Harrison’s site, which published conflicting views on euro technicals, particularly highlights Andy Lees at UBS: “My guess is that the euro still has quite a bit further upside to the high 1.30′s (ie about 7%)”.


Given the wrangling of commentators and the market moves we’ve seen lately, one-week EUR/USD straddles at around two big figures don’t look expensive at all.

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