Euro Rallies Will Be Limited to 1.3300 Area

  • See “Trade of the Day” below for EUR/USD Sell Recommendation
  • Kiwi emerges as strongest currency post Fed
  • RBNZ warns of taking action to offset stronger NZD
  • Retail positioning still does not favor USD long positions
  • Fed offers no new insights from latest rate decision
  • US equities should be sold into rallies; deeper setbacks ahead
While we are not entirely surprised to see Kiwi find renewed bids on Thursday, in light of the broader currency strength in markets, we are taken with the outperformance in the commodity currency. The New Zealand Dollar is the strongest of the major currencies on the day, and this comes after the RBNZ left rates unchanged at 2.50% while also warning that the high Kiwi would lead to a reassessment of monetary policy. Yet, this statement from the central bank has not scared risk traders away, and the market has shot back above 0.8150. Still, we see the rally as corrective, and overall, our core bearish outlook for the NZD and currencies in general against the buck remains bearish.

Relative performance versus the USD Wednesday (as of 9:30GMT)
NZD +0.52%
JPY +0.30%
AUD +0.29%
EUR +0.23%
CHF +0.18%
GBP +0.16%
CAD +0.15%
However, as we highlighted in yesterday’s commentary, the prospects for a legitimate reversal back in favor of the buck are still on hold. Despite underlying fundamentals which we feel should support additional USD bids (shift in Fed policy, ongoing Eurozone uncertainty, threat of slowdown in China and correlated economies), market price action seems to still want to push the US Dollar lower. Our in-house sentiment index continues to show retail traders adding to USD longs, with the ratio of long USD against the Canadian Dollar at over 7:1, short Cable at around 6:1, and short EUR/USD at over 2:1 (a lot for this market). Instead, we will wait until we see evidence of these ratios flattening out before dipping our toes back in the water.
It is usually at the moment when retail traders have finally given up that we find that a trend will often reverse in the direction that they had hoped for. We call this the “of course” moment, because at that moment, just after they have exited the position for a large loss, the market turns around and aggressively trades in the direction they had hoped for. The retail trader is left with nothing else to say buy “of course” …”now the trade finally goes my way.”


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