Every now and again there is a no-brainer trade.
You think it’s a no-brainer, but that is of course no guarantee of success.
However when you see one, you have to act.
Right now shorting the Euro is a no brainer.
The ECB has to continue to expand its QE program come what may.
Japan has just introduced negative interest rates, so the pressure ratchets up for the EU in a game of the race to the bottom in monetary stimulus.
Meanwhile the dollar is set to continue its long term ratchet upwards.
The simple play is short Euro versus Dollar. It’s a low leverage, buy and hold position.
At the very least, the US should hold interest rates steady and by implication Europe has to dig deeper into a loose money actions to get the outcome of growth it is desperate for.
Personally I’m short Euro versus pound, as over time a move from the low 130’s to the 140s in on the cards.
The UK was talking about raising interest rates but that hawkishness has gone away. However it is more likely to return to return to that stance than loosen. Meanwhile Euro seems on a one way path of more QE and easing. Even Germany is going to need a lift if the China recession continues.
It won’t be all plain sailing, There is a hitch in this picture but it is also an opportunity.
When the stock market goes into correction, and this will happen regularly from time to time going forwards, both the Euro and Yen strengthens as money runs for cover as it leaves stocks and needs a home. Cash has to hide in currency and global bonds as it waits on the sidelines. Yen and Euro are homes for this ‘risk off’ trade and they spike as the cash floods in to the safety of their harbors of liquidity.
While the market is tumbling or about to tumble, the Euro will rally.
So long term the Euro will fall but every time the market slumps, up it will go. This is an opportunity to enter a short trade, sell the euro rally, because when the stock market rallies, the Euro will fall back as money leaves the sidelines and buys the stock rally.
The Yen has seen exactly this action, accelerated by the shock and awe move by the BOJ on 28th of January, to push Japan into the zone of negative interest rates. The Yen consequentially collapsed from if recent highs powered by the correction in world equities and stocks continued to rally.
This QE move has spiked global markets re-enforcing the Yen’s fall more. This is playing the markets against a back ground of constant intervention. It should be easier to trade than old random markets, but it is still not for the faint hearted.
The Euro is likely to follow the yen, falling against the Dollar and to some extent the pound if the markets continue to rally. With a move to ‘risk on’ sand more pressure for the ECB to up its QE game, the no-brainer element of this idea says the Euro must fall heavily now.
The Global stock markets pattern of sharp corrections followed by vertical rallies is powered by central bank intervention or at least the perception the intervention and it likelihood.
This ‘buy the flaming dip’ dynamic will continue to see both the Yen and Euro oscillate between fear and greed, strength and weakness, but the long term trend especially for the Euro will be down.
Cenrtral banks are not going to stop this constant manipulation. They are trapped, they probably think its actually their duty to curate the once free market. In any event it seems extremely unlikely the they will set the market free, so these volatile move will be cyclical for a long time to come.
Risk off = Euro up
Risk on = Euro down
Likewise the yen.
Here is the process with the Yen dollar.
Here it is with the Euro v pound.
It looks highly likely unless the bottom falls out of the stock market again quickly, that the Pound Yen is going back towards the 1.40 level.
The currencies are currently leading indicators of dips and lagging indicators for rallies and therefore a perfect combination for traders wanting to ride the storm of this unfolding bear market.