Come sit beneath the tariff wallsRemove
Among the scuttling unemployed,
The rodent pack; sing madrigals
Of Demos and the Cyprian maid
Bewildered by the golden grain,
While ships with peril in their hulls,
Deploying on the lines of trade,
Transport the future of gangrene.
Stanley Kunitz, The Economist’s Song
Commentary & Analysis
No change to our view despite the near-term volatility and rally in EUR/USD again this week. We suspect now that the currency has achieved our correction objective (1.3650-level), another major leg down in euro will begin soon. The momentum may carry the euro at these levels for a few days; but as early as late next week we expect the downtrend to resume.
Key points this week:
1) Traders were relieved by ECB President Draghi’s press conference on Thursday; as he sounded more upbeat than expected. The euro reacted well. But the reality is deflationary pressures are growing across the Eurozone and the ECB may have to act sooner, rather than later. Action by the ECB will include additional easing (in some form or fashion) and trigger a further decline in Eurozone interest rates; just as traders are warming to the idea of higher interest rates in the US. The catalyst for this growing sentiment for higher US rates is continued decent economic numbers from the US and a better than expected non-farm payroll report on Friday.
2) We still like the growth and yield story; both seem very much skewed in favor of the US and therefore the dollar relative to the euro…
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Our corrective was near 1.3650-level; that was breached this week, and today the pair hit a high of 1.3700. This correction higher in the euro, from a technical perspective, has been a bit more complex that we expected. But we don’t believe it will carry much higher from here. Our view, especially after our corrective target expectation was achieved, is that a major leg down to carry to the 1.2700-level will begin soon.