Euro: When the range breaks it could really break. The euro has again frustrated the bottom pickers and the perma-dollar bears. It is has again been turned back after flirting with the upper end of its month long trading range. This time it was concern that Europe appeared increasingly divided over whether there should be a regional solution or should the experienced IMF play a leadership role to the deficit/debt issues of members like Greece.
The trading range that has prevailed has corrected the technical over-extended condition created during the euro's 17 cent-3 ½ month decline from late November through early March. This is evident on stochastic and MACD's. On the other hand, market positioning and sentiment suggest a bearish view is well entrenched.
Medium term investors should take on the attitude of the state of Missouri, the Show Me State, when it comes to the euro. We should assume the ranges hold until proven otherwise, rather than to believe the breakout is imminent. It means as long as the euro is between roughly $1.3500 and roughly $1.3800, it has gone nowhere. Pay attention when the range is broken, but look for some confirmation, like a close of the NY session above the top end of the range, giving it some play.
Indications from the options market is that we might not have much longer to wait. Three month implied volatility has been trending lower since the euro peaked in late November. In recent days it has fallen to about 10%, a level not seen since Lehman's demise. Like a spring coiling, it tends to precede a large spot move.
The take away for medium term investors is that when the range does break, the technical conditions in the market suggest it could be a sufficiently large move that even those that regard the currency more passively would want to take into account. While we have a dollar positive outlook on the medium term, short-covering could see the euro rally a few cents first.
Sterling: Too Many Negatives to Trust Valuation Models
The British pound began the month of March with a 4 cent decline. It exhausted the selling pressure and sterling has spent the time since then recovering. The move has been sufficient to get the 5-day moving average to cross above the 20-day moving > average, which is often a useful guide of the near-term trend, and thus encouraging some bottom picking.
Much bad news has been discounted by sterling's slide. And the negativity toward it may be illustrated by the fact that the net speculative position at the IMM has been short sterling since August 2008. Talk about a crowded trade. This net short position was a record in early-March.
Of the major foreign currencies, it may be the cheapest on valuation models, like purchasing power parity and fundamental equilibrium exchange rates. This may seduce some medium term investors to take another look at this beaten up currency.
The BOE has stopped buying gilts and the UK gilt market has generally under-performed.
