Barclays and ING Strategists Forced Out of Short Trade on EUR/USD Spike

Currency strategists at ING and Barclays have been forced out of their short euro / dollar trade, mirroring the experiences of countless other market traders.

The euro spiked in agressive fashion on Monday the 25th of August as global dynamics demanded currency markets shifted out of dollars and pounds as expectations for interest rate risees at the Bank of England and US Fed where drastically cut back. 

The commodity currency complex also took a battering as Chinese market turmoil has a direct link to their economies via declining commodity demand.

Currency markets are a two-way play, with USD, GBP, CAD, ZAR, AUD and NZD all being dumped some currencies had to benefit. Step in the euro.

“The revival in the single currency continues, and not just in relation to sterling: last week’s surge against the dollar (+2.5%) lifted it to its highest reading since May as investors repositioned themselves into a currency with no commodity exposure,” says analyst Bill McNamara at Charles Stanley.

Technically Attractive for a Buy

Once upon a time it seemed everyone was willint to take a punt against the euro with eyes on the big prize of parity in EUR/USD. This school of thought appears to now be changing.

McNamara’s recent studies show that the euro is starting to break back up through its 40-week moving average and although it already looks relatively overbought at this stage the current market conditions are such that further near-term upside still appears to be a realistic possibility.

“A close above 1.145 would open the door to a run up to 1.18,” says McNamara.

According to Anders Soderberg at SEB the rally in the euro to dollar conversion was finally tempered on the north side of the 233day exponentially weighted moving average band (1.1490/1.1615, based on session lows, closes & highs).

"The wave structure may either be a ‘Double Zigzag’ or a straight ‘A-B-C’ with a more developed 3rd leg higher. Either or, it is incomplete as it stands right now, so short-term pundits will look for the near-term correction lower to fade and develop into a buy (likely around 1.1534/1.1427 and target +1.18," says Soderberg.

ING: Exiting Short Euro Dollar Strategy

Currency traders who have done well following the trend over recent times have been burnt by the extraordinary moves in currency markets today.

ING have confirmed they have also fell victim to the volatility:

"Following the extremely volatile price action in markets over the past days, we are closing our downside EUR/USD seagull position we initiated on 18 June (see short EUR/USD). We take a loss of 0.80% to unwind the structure (which was zero cost to initiate).

"At the current market environment, we think it is prudent to do. Even though the EUR/USD rebound looks somewhat overdone, things may get worse before getting better."

We will bring further coverage relating to other prominent institutions shifting their exposure on the currency markets in due course.

Barclays: Out But Still Bearish EUR

Also bailing out of the euro dollar trade are Barclays who opened a short EURUSD position on 8 May 2015 and adjusted on 4 August 2015 for a loss of 214bp (spot reference: 1.1240). 

However, the remain convinced the euro will still fall:

"The associated tightening in euro area and Japanese monetary conditions in an environment of falling oil prices and growth expectations likely increases the probability of easier or longer monetary policy accommodation in these economies.

"As a result, we now have even greater conviction about further EUR and JPY depreciation against the USD, even in an environment where the Fed may likely have to delay hikes for some time. 

"The ECB likely will be particularly concerned by sharp drop in market measures of inflation expectations and the subsequent increase in real interest rates at a time when the economic recovery remains fragile.

"The 5-year, 5-year forward break-even inflation rate is currently trading below 1.6%, down from almost 1.9% in early July, reinforcing the risk that the ECB may have to extend its large-scale asset purchase programme (QE) beyond September 2016."

Markets: Another Yuan Devaluation

With the US markets capitulating at the final hurdle last night, and more volatility in the Chinese markets this morning, the European indices opened at a loss this Wednesday.

Another yuan devaluation saw the currency hit a 4 year low, and continued the People’s Bank of China’s scattershot approach to providing aid for its slowing economy and erratic stock market.

Meanwhile Its last move, the PBOC rate cut, was as insufficient as many expected, even if it did arguably prevent a third day of complete collapse for the Chinese markets.