This is from Douglas Borthwick of Faros Trading. He has been bullish for awhile and correct. He remains bullish, but while everyone else is scrambling to revise their projections higher (as he predicted) he is sounding a bit cautionary. Maybe it is the fact that he has been correct, or that he isn’t busy getting stopped out on his shorts, but his note makes sense. And I continue to believe that the correlation between Euro and US stocks has dropped dramatically, if not broken. I am less optimistic on the potential outcomes in Europe (or the impact of the G20 announcements) but this is a good quick read.
Having swum uphill against the tide for the past month with my Long EUR/USD view I admit I get a little perturbed when banks start looking for a higher EUR/USD too given they have been a bit of a reverse indicator as of late, however I have gone back to the charts and still see room for a higher EUR/USD, with the next ‘fair value’ levels being 1.3600/1.3700.
Most interesting is: As the EUR/USD plays catch-up to the move back in EUR/USD 2yr Basis swap (EUBS2 Curncy ), the basis swap has actually started to widen out. For the EUR/USD to break above the 1.36/1.3700 area this basis swap needs to come in further. The 3yr LTRO next week could help with this, but if it does not, then I would expect EUR/USD to trade sideways, fluctuating with tape-bombs etc. A higher EUR is better for Europe given higher Oil Prices. So higher Oil is supporting the EUR move.
Obviously any action in Iran/Syria could see a return to the ‘flight to safety’ for the USD, however although there are drumbeats for action, the tune is not yet playing. I remain bullish the EUR/USD, but my caution level is rising.
As a reminder, the G20 Fin Mins will poll each other this w/e to see how much each can give to the IMF to further bolster its resources. They will NOT announce anything re Greece, other than support for what Europe and Greece have done so far. Money to the IMF is dependent on Europe ‘bolstering its firewall’… translated as Europe merging the EFSF and the ESM. This could happen as early as the first week in March. Once that is done we have to wait for the IMF meeting in late April for an announcement of increase in IMF resources and a greater firewall for the IMF. Lots of negotiations until then… BRICs want greater representation at IMF, China wants ‘market economy’ status in Europe.
Happy to discuss any/all…
Douglas C. Borthwick
Faros Trading, LLC
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