Foreign Exchange – EUR/USD will reach 1,5000 this autumn

EUR/USD

It is long time ago since I have seen EUR/USD trading in such tight range as it has for some time. When we have these situations some players tend to sell volatility too late, it also happens these days.

Some investors have bought “Double-no-touch” options with barriers at 1,3900 and 1,4500. It means that EUR/USD has to trade within the defined range until maturity. Betting that something will stay within a range is equal to sell volatility. The EUR/USD volatility has gone down for a long time so from a volatility perspective some are selling at the lows. It feels like the typical trades that some are done when the range is about to break. The trades can be so big that the position taker can and will protect the option, but I doubt this is the case.

I have been right on the EUR/USD development for some time, but partly because I am wrong on the stock market. In particular in Europe and US are currency traders happy to trade EUR/USD following the developments in stock markets, taking EUR/USD higher. In Far East the trading pattern has already changed to follow macro economic outlook, though after important economic numbers the tendency also is visible in European and US trading sessions.

When the focus shifts towards fundamentals, my opinion is that the uncontrolled debt situation in US will be a major concern. Another interesting fact is, that very many I speak with are not prepared for a lower greenback nor really believe in EUR/USD levels above 1,5000 again.

The only true argument for a growing USD appetite is the 10 year government bond yield spread that basically should support the Dollar. It’s just not in the cards yet, focus will be on the debt.

I go for 1,5000 this autumn.

EUR/GBP & GBP/USD

The Bank of England governor Mr. Mervyn King always has a surprise ace to play. Sterling has lately been sold off for a couple of reasons. It has turned out that the quantitative easing hasn’t shown any effect at all after 6 months. No surprise, you can just ask Bank of Japan about their experience form 1990s. The Bank of England has sent out £ 140 billion in the system but during the same time the commercial banks deposits at Bank of England went up from £ 31 bio to £ 152 bio.

The news alone was disappointing for some investors being long Sterling but Mr. King’s reaction fuelled the GBP sell off. He seriously considers the Swedish model with negative interest rates, where commercial banks are punished with -0,25 % in interest rate if they deposit money in the central bank.

To be long Sterling is more expensive so it is fair that GBP corrected lower, but it also highlight that the problems in UK are tougher to fix than hoped.

It also gives food for new thoughts as I was predicting an even stronger Sterling like towards 0,8000 in EUR/GBP terms. Concerning UK I had expected some signs where I could hang my hopeful hat on, but it’s hard to find. UK might be the first economy to prove that the recovery is longer and slower that we like.

Should EUR/GBP trade around 0,9000 again, though depending on the market situation, I still fancy Sterling for a fundamental move towards 0,8000 in EUR/GBP.

EUR/JPY & USD/JPY

The new Japanese government is covered in the Hot Topic on page 10, where I conclude that the coming government is very unlikely to intervene if Yen goes stronger. As the Japanese bond yields constantly are climbing higher, Japanese investors are more likely to keep their investments in Japan or even move them back from US. Before end of November the new governments FX policy will be tested seriously when USD/JPY trades lower on that background.

The fundamental economic data can in no way give any support for Yen, but investors in Far East and Japan see risks on the rise. Therefore they are going back to the safe heaven currency JPY. The capital based flows I currently regard as more important than moves based on fundamentals.

I go for 86,00 in USD/JPY.

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