After Yellen announced that the Fed will taper QE by another 10 billion dollars to $45bn monthly pace (largely priced in by the market, no effect on the dollar and US yields), it was Draghi’s comments last Thursday that triggered a reversal of the US dollar against the major currencies. During his press conference in Brussels, he said that the ECB officials were comfortable with acting in June if needed (in response to WSJ Brian Blackstone). The Euro, which surged to 1.3992 against the greenback after Governing Council of the ECB decided to keep interest rates steady (refi rate at 0.25%, deposit rate at 0.00% and marginal lending facility rate at 0.75%), fell dramatically after Draghi’s words. As you can see it on the chart below, it broke its 10-month uptrend on Friday (closing below it), its two supports at 1.3775 (April 30 low) and 1.3739 (100-day SMA) and seems on its way to test 1.3671 (April 4 low).
The single currency is now trading at 1.3710, down 60 pips from this morning’s high after Bundesbank comments ‘willing to cut rates if needed’ combined with disappointing German ZEW survey (economic sentiment printed at 33.1, well below expectations of 41.0). We believe that the bearish trend is ON now on the Euro, and our next target stands at 1.3670. Another good strategy would be to short EURGBP ahead of UK employment reports and the UK Quarterly inflation report this week. Economists expect the unemployment rate to decrease by another 0.1% to 6.8% in March (with a claimant counts change of -30K in April). Moreover, the divergence of monetary policy between a ‘hawkish’ BoE that is considering so start raising rates early next year and a ‘dovish’ ECB should act in favour of the British pound. The next resistance on the downside stands at 0.8100 (Jan 4th 2013 low), followed by 0.8030.
We would play that short EURGBP with long USDCHF and USDJPY positions as we believe that US yields will continue to strength. In our last article What could wake up the Dollar (from its coma), we said that the US Dollar would need ‘some action after all these policymakers’ talks’ in order to start strengthening against most of the currencies. The next move we are waiting is from Kuroda and BoJ officials after Japanese data continues to disappoint. Yesterday, the Ministry of Finance reported that the current account surplus was smaller than expected at JPY 116.4bn in March (vs JPY 305bn expected). Our target on USDCHF would be at 0.9000; and our first target on USDJPY is at 102.80.