Forex – What I Like / Dislike 01.25.13

Will be on CNBC Street Signs this morning and wanted to give you a sneak peek of my notes:

I like EUR and AUD

For EUR:
– All of $ that was parked in Switzerland and U.K. for safety and now its coming back
– Strong German data means IMF and others could be underestimating EZ growth
– ECB begins taking back liquidity with LTRO repayments

– Sharp move lower not warranted
– Chinese data consistently surprising to upside
– RBA will leave rates on hold

I dislike

– Triple Dip Recession Risks
– Investors and central banks dumping GBP
– Talk of EU Referendum weighing on currency

– BoJ Easing, need I say more?
– Yen weakness not helping trade much give territorial dispute with China
– Strong uptrend, keep buying USD/JPY on dips (or selling yen on rallies, depends how you want to say it)
– Incoming BoJ Gov in April could speed up open ended asset purchases

Chart: EURUSD and 10 Yr Spanish Yields

There’s been a lot of talk about Spanish 10 year bond yields rising to 7 percent. We’ve been at higher levels in 2011 but at that time the EUR/USD was trading much higher. 7 percent is a critical level because that is the rate that pushed Greece, Portugal and Ireland to beg for aid. The orange line is the EUR/USD and the white line is Spain’s 10 year bond yield. That divergence is looking ugly!

Does Sell in May, Go Away Apply to EUR?

There is a very old saying in the stock market that goes “Sell in May, and Go Away.” This pertains to the notion that investors should cash in on their investments this month and take the summer off because June, July, August and September have traditionally been some of the worst months in the equity market.

Over the past decade, this adage has held true. If you were to sell the S&P 500 at the end of May, you would have avoided an loss over the past 10 years. For the EUR/USD however you would have lost out on a gain but selling USD/JPY in May would have been a great idea because the currency pair fell steeply between June and September.

Looking beneath the hood however, the decision to sell in May and go away for the summer is not so easy for currency traders because if you did so in 2009 and 2010, you would have missed out on big gains in the EUR/USD. Between June and September of 2009, the EUR/USD appreciated more than 3 percent and in 2010 it rose nearly 11 percent.

This year, there is a reasonable chance that stocks could continue to fall, leading to more risk aversion in currencies because US data has been mixed and central banks are returning to easier monetary policies. However following seasonality without following stories blindly would be a big mistake.

Chart: EUR on its way to match Dec LTRO Move?

Since this week’s LTRO operation, the EUR/USD has fallen 3 straight trading days by as much 280 pips. Based on this price action, it looks like the pair is on its way to “mirroring” the post December LTRO move. It wouldn’t take much for this to occur – all the EUR/USD needs to do is fall another 180 pips which would STILL put it above the psychologically significant 1.30 level. Back in December, the selloff in the EUR/USD felt so much deeper because it triggered a break below 1.30 and a move to an 18 month low. I’m betting on it happening again. What about you?