The Euro: Just because it’s obvious doesn’t mean you should fade it

[signinlocker id=675]The two themes that have been lurking in the shadows in support of the euro are now strutting their colors. The first, is that the US is closer to the end of its hiking cycle than the beginning, while the ECB is just starting its normalization. The second is that in this phase of the global risk cycle when US valuations look full to many, investors tend to migrate out the spectrum from core to peripheral investments. This too has tended to favor a weaker dollar.

Last week the euro had a big break out. So did the yield on the 10-year bund. It’s not a coincidence. And just because we all see it doesn’t mean the odds will be in your favor if you fade it. I could be wrong, but this has all the hallmarks of a move that is fresh and could have legs. Probably not wise to try and fade–no matter how heavy the positioning–until you see price and correlation signs that the above narrative is weakening. In fact, the break is fresh enough, and vol levels are low enough (despite last week’s pop), that outright calls or call spreads probably still make sense. (NB: the low tick in euro vol in 2014 was just before the big euro move lower.)

Here are the charts:

Euro over the past year
Euro over the past five years
Ten year bund yield over the past five years
Euro 3m implied ATM vol over the past five years

But, on the other hand….spec euro positioning in futures is the most long its been in the past 10 years

CFTC Net non-commercial futures positions in the euro

Manage your risk. Good luck.[/signinlocker]

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