EUR exploded Tuesday morning with a sassy rally that obliterated any remaining dollar bulls in its path. I’ve said before I am not a fan of chasing breakouts so the question is how can you make money off a rally that is already over? My approach is to find a buying opportunity which pins the strong rallying currency against a weaker one. Tuesday night my preference was to buy EUR/GBP.

The Fundamental Picture

Matching a strong currency with a weak one is simply a process of comparing the fundamentals and overall market sentiment.
Euro has published respectable fundamental data and staged its recent rally on the heels of a strong German Producer Price report for October. While the European Central Bank has squawked about Euro’s record highs and climbing oil prices the sentiment is EUR/USD will continue to $1.50 unabated. Overall the Euro Zone really only has itself to beat fundamentally right now if it were going to lose ground.

Sterling on the other hand has seen plenty of turbulence recently and is playing defense. Northern Rock’s meltdown, trouble in the housing sector, industrial slowdown talk and this week lower money surpluses made GBP’s fundamental landscape far less rosy. Finally, the market was anticipating the Bank of England’s minutes Wednesday morning and talk of a possible rate cut made GBP a sitting duck against Euro Tuesday night.

The Technical Picture

Adding all this together the decision to buy EUR/GBP was easy with the remaining task to find a technical entry point. During the Asian session EUR/GBP ranged offering a slick support zone to buy at $0.7175 around 11:00pm Central Time Tuesday night.

The trade was in the money almost from the start and this morning we see the position up 30 points.

Hopefully I’ve shown you a smarter way to profit following the next huge rally without the risk of chasing it. Buy the strength, sell the weakness and you will make money.

Best of luck,

Ryan

My friend and trading Guru Rob Booker posted an interesting “quick-and-dirty” look at the correlation between EUR/JPY and the Dow. Money flows into EUR/JPY seem to be influenced heavily by the attitude traders have toward risk since JPY is the preferred currency to pit carry trades against. Boris Schlossberg from FXCM and DailyFX.com regularly points out how a falling Dow can drag down EUR/JPY and Rob’s research seems to support that claim.

“For 2007, it seems that the Dow and the EUR/JPY have a Correlation Coefficient of 83%.
-Rob Booker”

EUR/USD traders can consider this correlation to filter potential positions because in my experience EUR/USD tends to fall shortly after EUR/JPY is dragged down although I don’t have a fancy graph like Rob has to prove it tonight!

Just one more thing to keep in the back of your mind when planning trades on EUR based pairs.

To view Rob’s data in detail and read his entire post, click here.

-Ryan

My mind is in certified holiday mode ahead of Thanksgiving Day so I’ll try to avoid thinking about the deserts my Wife has planned long enough to analyze Euro’s next move.

To state the obvious EUR/USD has entered a clearly defined consolidation triangle. The consolidation has narrowed to slightly over 100 pips suggesting a breakout could be coming, which way depends on who gains the fundamental advantage over the coming days.

Euro fundamentals are still respectable although they have cooled a bit allowing Greenback to punch back by posting among others, a 3.9% GDP growth. Last week it appeared the market was ready to turn dollar bullish for at least the short term until the Treasury Inflow Capital report suggested the world was making good on its promise to dump dollar as their preferred reserve currency. For an economy dependent upon debt buyers, this is clearly not a good sign.

Although dollar strengthened a slightly today, my guess is Euro fundamentals will not be anything special but U.S. fundamentals will be worse enough to fuel the EUR/USD through $1.48 on its way to $1.50.

U.S. Fundamentals Are Icky

I see the housing situation as a regional problem rather than a reflection of the economy’s state as a whole. While neighborhoods in California have entire streets in foreclosure, North Texas for example has rising house values and an optimistic future. The question becomes how much bleed over will the regional housing situation have on the American consumer nationally as companies affected by the housing situation downsize and lower revenue targets?

The Economist.com pointed out a $100 fall in real estate wealth eventually reduces consumer spending between $4 and $9 per household. Consider a Californian home owner who has lost $150,000 in real estate wealth over the last 12 months; if The Economist.com is correct that translates to a per household reduction in consumer spending between $6000 and $13,500. Combining the loss in home equity lending, a falling stock market, and rising oil prices you can see why retailers are already forecasting lower sales in the 4th quarter.

Consumers in the lower, upper class as well as home owners appear to be trimming back their spending already. Wal-Mart, Nordstrom and today Lowe’s turned in either lower than expected sales or lower same store sales for the 4th quarter and many are lowering their 4th quarter forecasts. American consumers may have spent their last line-of-credit dollars over the summer break. Finally, one statistic I find staggering is that household debt as a percentage of disposable income has reached 130%! How much more can the American Consumer charge and still pay their bills? I’m guessing not much considering credit card delinquencies are starting to rise as well.

So you see my point? Euro Zone fundamentals may be cool off but as long as they remain stable I don’t see the U.S. wining the fundamental battle anytime soon.

Nice Speech, So How do I Make Some Money on This?

I’m so glad you asked! Clearly I am dollar bearish but given the U.S. holiday and absence of U.S. fundamentals this week I would wait until next week to trade. I’m also not a fan of trading breakouts so if EUR fundamentals break the pair north of $1.47 I wouldn’t recommend chasing the breakout until it tests the $1.4752 high from the topside.

If you trade EUR at all this week, I would enter near support at the bottom of the consolidation range as illustrated in the chart below. Additionally, consider a smaller volume position this week because trading in thin volume can produce jumpy market swings, there is no need to expose your full capital this week.

Personally, I’m still long EUR from a trade I placed last week at $1.4570. I’ve already banked 84 pips on ½ of the position so my strategy this week will be to manage that trade.

Happy Thanksgiving and good luck!

-Ryan

Because driving in afternoon traffic stinks, enough said.

So there I was with an empty beer and a two day old USD/JPY short I’d almost lost hope on when out of the blue my friend emailed me this article from Bloomberg. Apparently supermodel Gisele Bundchen prefers to be paid in Euros for pitching Pantene and Dolce & Gabbana products!

So the way I see it, if Buffet and Bundchen are both dumping dollars perhaps there is hope for my USD/JPY short after all! Them-Thar’s some fundamentals for ya!

All I know is that my trade is now in the money after coming within 5 pips of my stop order and my beloved Dallas Stars stomped the Ducks 5 – 0 last night.

I think this is going to be a great week!

Side note; being against the carry is expensive when the interest difference is 4%. Don’t try this at home boys and girls unless you really, really mean it.