Unhedged capital flows into the EZ have been attributed to the following factors:
- Perception that EZ political risks have subsided, returning market focus back to economic fundamentals
- Improving economic fundamental picture and upside surprises in eco indicators have prompted significant asset allocation shift to European equities and thus, expectations of a rapid ECB policy normalisation
Net long positioning has reached a fresh multi-year high, exceeding the 2013 high to reach levels last seen in 2011. There is increasing risk of weakness in the EUR/USD cross if the recent normalisation hysteria fades (which is a significant risk given Draghi’s highly accommodative stance and recent inflation upticks being largely attributed to higher energy prices).
Equity flows show that US investors who have begun to purchase European equities have been doing so mainly on a FX unhedged basis, thus there is a large potential for hedging and EUR long liquidation in the event that sentiment cools. It is also worth considering the attractiveness of hedging recent substantial equity price gains for US participants (esp. French equity investors) as a positive carry is obtainable.
It is fallacy that PIIGS risks have dissipated as some market participants believe. Spain’s 5yr CDS increased by 22% last week with the news that Banco Popular may not find a buyer and may have to be wound down; the bank is constantly reviewing how to bolster liquidity drained by deposit removals and a deterioration of its credit. $BMPS is not out of the poo yet, we must remember that previous bailouts by the Italian Treasury were unsuccessful; all eyes on the restructuring plan. Silence and reassurance are key assets for insolvent banks, remember this!!
Looking at the upcoming ECB meeting, the risk of a more hawkish policy surprise is limited given inflation pressures remain subdued (EU yield curve looks like it’s ready to flatten quickly; expecting EU CESI to follow the US’s – there is usually an 8 week lag to the US).
In terms of targets, I am looking at 1.10 for t/p 1 and 1.075x (gap there which needs filling. Statistically, there is a ~70%+ chance that the gap fills before 1.13 is reached; take that as you will!) for t/p 2.
- Perception that EZ political risks have subsided, returning market focus back to economic fundamentals
- Improving economic fundamental picture and upside surprises in eco indicators have prompted significant asset allocation shift to European equities and thus, expectations of a rapid ECB policy normalisation
Net long positioning has reached a fresh multi-year high, exceeding the 2013 high to reach levels last seen in 2011. There is increasing risk of weakness in the EUR/USD cross if the recent normalisation hysteria fades (which is a significant risk given Draghi’s highly accommodative stance and recent inflation upticks being largely attributed to higher energy prices).
Equity flows show that US investors who have begun to purchase European equities have been doing so mainly on a FX unhedged basis, thus there is a large potential for hedging and EUR long liquidation in the event that sentiment cools. It is also worth considering the attractiveness of hedging recent substantial equity price gains for US participants (esp. French equity investors) as a positive carry is obtainable.
It is fallacy that PIIGS risks have dissipated as some market participants believe. Spain’s 5yr CDS increased by 22% last week with the news that Banco Popular may not find a buyer and may have to be wound down; the bank is constantly reviewing how to bolster liquidity drained by deposit removals and a deterioration of its credit. $BMPS is not out of the poo yet, we must remember that previous bailouts by the Italian Treasury were unsuccessful; all eyes on the restructuring plan. Silence and reassurance are key assets for insolvent banks, remember this!!
Looking at the upcoming ECB meeting, the risk of a more hawkish policy surprise is limited given inflation pressures remain subdued (EU yield curve looks like it’s ready to flatten quickly; expecting EU CESI to follow the US’s – there is usually an 8 week lag to the US).
In terms of targets, I am looking at 1.10 for t/p 1 and 1.075x (gap there which needs filling. Statistically, there is a ~70%+ chance that the gap fills before 1.13 is reached; take that as you will!) for t/p 2.
Comment:
V small positions here guys, would be inclined to raise the stop loss considerably too .. on second thoughts, 1.141x is a better place to add the bulk of the damage
Comment:
Momentum divergence on H4 chart, e/u is feeling the pressure here. Sensible to load up on some damage here
Comment:
Took profit on move following ECB decision .. out now, 1.14 is up next .. not wise fading this move
Comment:
Actively looking for entries again on H1 t/f .. looking very heavy here, 1.10 incoming (Fed changed the status quo)
Comment:
there go Veneto Banca and Banca Popolare di Vicenza at a cost of £15bn to the tax payer .. $BMPS shhhh
Comment:
out at b/e .. we're going higher
Comment:
Added short positions here; can't be bothered to post a new idea so just adding onto this one. Judging by reactionary price action, dollar seems to be want higher (we saw dollar bids throughout today following a poor NFP and end of month flows seem to suggest re-balancing in favour of USD) and this EUR move is overstretched technically and fundamentally
Comment:
Taken profit, flipped long at 1.171x