How Low Can Euro Go?

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Market Drivers Nov 09, 2015

USD/JPY makes fresh high above 123.50
Majors stage a short covering rally
Nikkei 1.96% Europe -.22%
Oil $44/bbl
Gold $1093/oz

Europe and Asia:
AUD ANZ Job Ads 0.3% vs. 4.0%
EUR GE TB 19B vs. 20B
EUR Sentix Investor 15 vs 13

North America:
No Data

With very little on the economic calendar at the start of the trading week, currencies have been generally quiet as the dollar saw some profit taking in the majors with the exception of USD/JPY which hit fresh multi year highs in the wake of much better than expected NFP numbers last Friday.

Friday’s surprisingly strong NFP report continued to reverberate through the markets as many analysts now predict a December timeline for Federal Reserve’s first hike in more than 8 years. With markets now clearly gearing up for normalization of US monetary policy, USD/JPY has been shaken from its multi-month slumber as it continued to post fresh highs above 123.50.

There is no doubt that Friday’s NFP report has been very bullish for USD/JPY longs, but the pair still faces multi- year resistance at the 125.00 level before traders could legitimately call a breakout.

Still sentiment has clearly shifted towards dollar bulls and nowhere is it more evident than in EUR/USD where analysts are tripping over themselves in calling for EUR/USD parity by 2016. Certainly there is good reason to think that the euro goes lower given the very clear divergence between US and EU monetary policies, but the calls for parity may be premature. Even if the Fed hikes rates in December, it is very likely to signal that the pace of tightening will be extraordinarily slow with any further rate hikes unlikely to take place unless conditions improve markedly.

In the case of “one and done” the market is much more likely to sell the dollar on the news rather than buy it, and that in turn could trigger a short covering rally in EUR/USD well before the parity level is reached. For now the pair is likely to target the key multi year support at the 1.0500 figure as traders focus on the immediate policy implications.

With no news on the US calendar as well, trading could remain quiet in North American session also, but any small rallies the EUR/USD will likely provide fresh opportunities for shorts as the pair remains in a very well defined downtrend.

Boris Schlossberg
Managing Director

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