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Is the euro’s four-month bull run over?

It was a week of heavy selling in the euro as a confluence of factors turned against it. Traders across the street say they saw heavy liquidation of long euro positions over the week, and it wasn’t just about the “de-risking trade,” that has seen the US dollar close the week higher.

Weaker commodity markets, where silver has fallen 35% in the last two weeks, the pricing out of a series of European rate rise expectations, and a stronger dollar versus the Asian currencies have all been reasons to sell the euro this week, traders say.

“We’ve seen a lot of deleveraging, and there’s been quite a bit taken out of the European curve,” which had more priced a rate hike more than the US, “so all the arguments for why you’d want to be long the euro disappeared,” says one head trader.

Yet there are other factors at play here too: One of the key drivers behind the rally in the euro in the first four months of the year has been the dollar recycling effect, where predominantly Asian central banks have been buying dollars against their own currency, and then switching the dollars into euros.

“What you’re seeing now is that every time there’s big movement in the euro, Asian sovereigns are being blamed for it,” says one trader. Furthermore, when the dollar-asia bloc rallies, as it has this week, central banks will hold back on some of the funds that they might normally look to recycle.

Little surprise then that the euro explored lower levels this week. Traders say the selling first started on the euro crosses, which was then followed up with more solid selling against the dollar, piercing 1.4150 before order books switched, and buyers emerged, say the traders. CitiFX Wire today (May 13), today reports that overall flow in EURUSD remains skewed (54%) in favor of purchases.

The standout buyers have come from the leveraged, investor and bank segments. In theory this appears to be a sizeable mismatch, but it seems to be driven by short covering rather than fresh positioning, Citi says.

Other traders agree that the euro may not yet be ready to find a base. “The upside seems to be limited, I think as this move digests, the rallies are going to be sold into with a fair amount of confidence,” says another spot trading head at a European bank.

 Global best performing currencies, year to date

 Source: Bloomberg
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