High conviction contrarian - Where to sell EURUSD this week?

2022년 8월 25일

The fundamentals in EURUSD remain skewed to a push lower, as the US (and Canada) remains the most attractive investment destination of the G10 economies. With this in mind, I’ve been impressed with how EURUSD has absorbed so much bad news, and the word ‘resilience’ has come up once or twice.

Perhaps the market has already gone some way to price in a fairly dark scenario. EU nat gas prices have had a dramatic shift higher, but inventory levels are high and should see Europe through the winter - this view would be re-assessed if the Nord Stream 1 pipeline doesn’t resume full flow on 2 Sept, or we hear of bitterly cold weather patterns emerging.

Either way, EURUSD is finding a bid, although a deeper dive this is more a USD story than broad love for the EUR – case in point, EURAUD is threatening to break down through multi-month support at 1.4370 and even EURGBP holds a range of 0.8500 to 0.8400.

Part of the USD offer can be explained by a stronger CNH (yuan) and it feels like USDCNH is driving the show today – a far stronger PBoC CNY (yuan) ‘fixing’ (at 11:15 AEST) has seen USDCNH lower and this has resonated in USD selling across the board.

EURUSD 1-week implied vol sits at 10.77% which is the middle of its 12-month range and implies a range of 1.0113 to 0.9867 over the week from current spot prices. While the 1.0120/30 area certainly interests, if the USD bears really make a play, the key area to look for supply is 1.0190 to 1.0200 – this is where we see the top of the channel EURUSD has held throughout 2022 and the 61.8% fibo of the recent 1.0368 to 0.9900 move. It seems a stretch to think we’ll get into these levels, but this seems the higher probability fade.

On the skew side, EURUSD 1-week call volatility trades in line with put vol so the options market is fairly balanced on where the next move plays out – ahead of Powell’s speech at Jackson Hole (JH) positioning will be key and again we see the market running a decent USD exposure, certainly from leveraged funds. Our own client position is now short USDs, with 69% of open positions long EURUSD – retail is often uber aggressive and contrarian, but there is a general bias for the USD to run lower into JH.

One to watch, rallies into 1.0190 would be where the elastic band snaps back, but this would be driven by the market reducing positioning into JH and a lower USDCNH.