Diary of a Financier

From the Trading Desk: Long EUR After This Week’s Divergence from Risk Assets

In Trading Desk on Fri 25 May 2012 at 18:09

And so we close another week. I wanted to note the inter-asset divergence between EURUSD and risk assets (i.e. EU Bond spreads & SPX) that developed this week, because I decided to take advantage of it this morning.

On Tuesday, the Euro dislocated from traditional correlations. It continued its slide lower to EURUSD 1.25 support under pressure from record commercial EUR net shorts… but risk assets like SPX relented, bouncing off oversold lows. As my trade reconciliation discloses, I bought the Euro FX ETF (FXE) for a trade. I’ve been blunt about my anticipation of a coming EURUSD bounce, despite my open long in the US Dollar Index (UUP). Both EURUSD and FXE are at right shoulder support of an inverted Head & Shoulders. The H&S pattern is weak due to a tilted neckline, which is part of why I don’t expect it to follow-through with a meaningful, long-term rally. I’m long FXE tactically here to catch a bounce off the Euro’s own short-term, oversold lows–to be aided by sharp short covering.

This morning, Tyler Durden observed the aforementioned EUR/SPX divergence:

Either equities and Italian Bonds have it right and EURUSD should be more like 1.28 (with the ensuing short-squeeze causing chaos in currency futures); or the S&P 500 should be under 1300 and Italian Bond Spreads over 60bps wider at 480bps?

So, I’m long EUR (via FXE), and I expect to unload quickly when EURUSD reaches my 1.27-28 target early next week. That technical bounce is not mutually exclusive of the immediate renewal of SPX’s selloff, which I myself called for earlier today:

  • $SPX daily bear flag w bear pennant/bearish indicators developed in 30-min intraday. $SPX $ES_F May 25 at 1:07 PM
SPY 30-min- bear pennant

ES daily/weekly/monthly- daily fractal shows bear flag, inevitably bearish.

Once capital markets experience compression enough to unwind this past week’s divergence in EURUSD/SPX, the re-alignment of different asset classes should arrange for a descent to SPX 1254 support.

–Romeo

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  1. […] bought index exposure to the Utilities ETF (XLU), then some Consumer Staples (XLP), and finally the Euro ETF (FXE) most recently. Overall, SLV fit nicely into the portfolio to help my otherwise […]

  2. […] bought index exposure to the Utilities ETF (XLU), then some Consumer Staples (XLP), and finally the Euro ETF (FXE) most recently. Overall, SLV fit nicely into the portfolio to help my otherwise […]

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