EURUSD levels of 1.2250 suggest that the euro is seen as an attractive alternative to the US dollar by the market. But in this context let us refer to Thursday’s ECB meeting. Even if the trade-weighted euro has risen far less than EURUSD, concerns as to how ECB President Mario Draghi sees the recent EUR reaction is likely to keep EURUSD under control until Thursday. But here in this write up we’ve discussed on euro trades scenarios with other pairs as well, especially against Aussie trough H1’2019.
Bullish EURAUD scenarios:
1) The ECB changes guidance in January/March, heralding an end to QE in Sept and hikes by 1Q’19.
2) Eurozone growth > 3%
3) Aussie unemployment rate moves back towards 5.75%, raising risks that the RBA responds to a weakening labor market
4) China data weaken materially
Bearish EURAUD scenarios:
1) Concentrated, sizeable repatriation by US corporates EUR accounts for a third of foreign profits.
2) Draghi challenges impression of a prospective change to dovish forward guidance.
3) A squeeze on record speculative longs, possibly from a sell-off in global risk,
4) The MS5 government in Italy or renewed elections after an inconclusive outcome.
5) China eases policy and commodities rebound
6) The RBA adopts a more hawkish tone to its communications
Well, amid all these what-if scenarios, ECB is also scheduled to announce its monetary policy tomorrow, how we estimate the basic monetary-policy stance of individual ECB Council members is what our readers must be seeking from us. Is someone a dove, for example, who often speaks out in favor of a monetary policy that shores up the economy? Or is the Governing Council member a monetary-policy hawk, who warns against overstepping the monetary-policy mandate?
For now, we emphasize our writing on the potential FX risks rather than anticipating whether ECB would be a hawk or a dove.
The euro’s overvaluation is only half its undervaluation when QE started. We hold existing EUR longs vs JPY, AUD and NZD and an RV trade in short AUDCAD even though super-high USD correlations continue to frustrate macro RV trades for now.
Alternatively, at spot reference: 1.5357, contemplating intermediate uptrend, on hedging grounds we recommend adding longs in futures contracts of far-month month tenors.
Holders in a futures contract are expected to maintain margins in order to open and maintain a longs futures position.
Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at -75 (which is bearish), while hourly AUD spot index was at -20 (bearish) while articulating (at 07:05 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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