Graphic, created on Bloomberg, shows that the euro is approaching key
area.
The white trendline drawn off the September 8, September 20 and October
26 highs comes in near $1.1745 today. Above there, the lower green
horizontal line is the 38.2% retracement of the drop since the years high was
recorded on September 8. It is
found at $1.1760.
The euro has been bid through the
20-day moving average (green line) for the first time since the ECB meeting in
late October. The five-day moving average (fuchsia line) is poised to
cross above the 20-day average for the first time since before the ECB
meeting.
The 100-day moving average, which is not
shown in the chart, comes in today a little above $1.1730. The
euro fell below it with the ECB-inspired sell-off at the end of last month for
the first time since April. It checked the euro earlier this month. A
move above this general area would target the $1.1825-$1.1885
area. The technical indicators on the daily charts warn of
this upside risk.
There is much talk about a seasonal pattern for euro weakness in Q4, but
we are skeptical. The euro did fall in October this year and the past
three years. It also fell on November
2014-2016. In December, the euro has fallen in two of the past three
years. If one flipped a coin six times and four times it came up heads,
one would not think the contest is rigged,
but some market participant sees a
seasonal pattern here. We argue that the sample size is too small and
when it is enlarged to cover the past 20 years, no such seasonality is
evident. Over the past 20 years, the euro has risen in exactly 10 of the
Octobers. It has risen in nine of the past 20 Novembers and
Decembers. If there is a pattern it might be that the euro’s performance
in Q4 is consistent with its underlying trend.
Recall that the euro put in the recent peak in 2014, when the seasonal
pattern is said to have begun.
Technical indicators of the daily bar charts suggest upside room, while the two-year interest rate differential
makes it the most expensive to hold long euros against the dollar since the
last 1990s. We continue to argue that divergence of monetary policy (rates and balance sheet) is
still more than a year away from peaking. We are inclined to view the
euro gains as corrective after retreating for the past two months.