Nov 29 2017

EURUSD view – Long term hedging ideas

The Fed is looking at an interest rate hike in Dec17 (indicated by chairman elect Jerome Powell’s statement yesterday) and then pause for a while (probably a long while). ECB on the other hand, is unwinding and tapering its QE programme in 2018. There is little doubt as to which is more attractive from bond yields’ standpoint. But, markets have rewarded the Euro in the recent past (despite the Catalonian crisis, Merkel’s weaker presidential position, etc). The bigger prevailing sense was Trump’s administrative failures than euro’s structural weaknesses. How long will this “rewarding euro and beating dollar” situation last is a billion dollar question – my sense, it will not last long.

Technically, head and shoulders pattern on the daily charts had failed to meet the target. The head at 1.2092 (blue line) and neckline (pink line) at 1.1661-1.1667 offers a target around 1.1230-1.1240. Euro recovered from the recent lows around 1.1550. This probably indicates that euro could re-attempt 1.20-1.21. If euro does reach those levels, it will form a double top and could run into a resistance. Moreover, 1.20-1.21 is the big whole figure and as such, is a psychological resistance. On the weekly chart, 50% retracement of the dollar rally from 1.3992 (8May’14) to 1.0339 (3Jan’17) comes around 1.2165. Also notice the downward moving trendline (blue colour) connecting the all-time peaks of euro.

Strong arguments to support euro’s big resistance around 1.20 – 1.21.

What to do?

Exporters: should look at hedging around 1.19-1.20. Increase hedge ratios if euro surges towards 1.20-1.21. Stop at 1.2150.

Importers: first target to buy is 1.15 – 1.16. Continue hedging if euro fall further towards 1.13 – 1.14.