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US markets are just opening and Fed Chairman is ready to testify in front of congress. China cut interest rates by 0.25% this morning and while the ECB left interest rates unchanged yesterday, Chairman Mario Draghi more or less hinted towards cuts in July. Overall, traders are buying into the central bank stimulated rally with commodities and equities flying higher, while the dollar and yen are down across the board.
For Forex traders the question is whether this move can last? Is the nearly 200 pip move from yesterday’s low to a current 1.2620 in the EURUSD anything more than a prolonged short squeeze? In the past, China had already cut its RRR early last week and even before the dismal US NFP report last Friday, it appeared all but certain that the Fed was going to apply another round of stimulus. While we are now experiencing the beginning of actual stimulus taking place, there really hasn’t been much that has changed since last week. Based on that premise, the EURUSD and company rally would be expected to cool down.
Nonetheless, as mentioned earlier this week, the quickness among Forex traders to dump their dollar longs revealed that they weren’t crazy to be buyers of the greenback to begin. As such, if Bernanke does come through and deliver a timeframe for more stimulus, we could see the current momentum continue, especially among the commodity currencies.
In these types of scenarios, our preference is to move away trading pairs with dollar exposure, and focus on non-dollar crosses. Specifically, we remain bearish about the EURGBP and view being short as the optimal way to take advantage of the Euro’s woes. After mentioning the EURGBP several weeks ago when it was trading at 0.8040, it had fallen to 0.7950 before spiking higher to 0.8140 this week as the GBPUSD had experienced a thrashing. However, the pair is back below 0.8100 on the Bank of England’s inaction at today’s MPC Meeting as well as a better than expected Services PMI number. With the ECB slated to start lowering rate again, we believe that the pair could see further downside as the longer term rotation of funds exiting from Euros to the Pound will continue.