This note was originally published November 05, 2014 at 12:38 in Macro
Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND:
- ECB Indecision: We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
- Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.
- ECB All-In: The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
- Into the Shadows: The ECB has no where left to cut from the ZERO bound in interest rates. Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.
- Extended Outflows: Record outflows of investment from Europe will continue to put downward pressure on the EUR. ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
- Broken Quantitatively: The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
- Downward Dog: Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
- Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
- Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
- Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.
This is a simplified hit parade – ping us if you’d like to dig into any of the points above.