The euro decisively broke below the psychological $1.3500 mark Tuesday, with the pair posting a new 2014 low around $1.3459 before stalling.
Traders were watching closely to see whether key dollar resistance levels in other currencies would also be vaulted, which would further confirm that the long-awaited dollar uptrend, envisioned at the start of 2014, was really starting.
The euro was trading at $1.3468 Tuesday afternoon, on the low side of the day’s range of $1.3459 to $1.3530. The pair Friday fell below $1.3503, the low seen June 5 when the European Central Bank announced new easing measures, but could not close below $1.3500. Such a close was last seen January 31.
The euro Tuesday has fallen below last week’s lows near $1.3491, as well as the 2014 lows near $1.3477, seen February 2013.
Niall O’Connor, technical strategist at JPMorgan, maintained that the clear-cut break of $1.3477 “should confirm the deteriorating medium term setup particularly following the bearish reversal in May with deeper targets near $1.3400-1.3295.”
The euro bottomed around $1.3400 November 21, 2013 and $1.3296 November 7, 2013.
On the topside, “the $1.3552-75 area should now maintain the more immediate downside bias,” O’Connor said.
While traders were hopeful that the euro was moving into a new downtrend, or at least a new lower trading range, they have been burned so many times that they were reluctant to build larger short positions just yet.
In recent weeks, the stars have been aligning for the euro to move lower, said Bob Lynch, senior currency strategist at HSBC.
First, the pair, “has persistently been trading in the lower portion” of the $1.3500 to $1.3700 range seen since the June ECB meeting, “really since May,” he said.
Second, the latest break of key euro support levels has the market becoming bearish and more willing to try a short position, he said.
“Lots of people are looking at these levels, so it’s important to see followthrough selling,” Lynch said.
This month, the euro has not responded much to geopolitics, fundamentals, economic data and or central bank action. with nothing, up until today, “generating much volatility in FX,” he observed.
“The longer the euro stays in this (sub $1.3500) area, it would suggest a more bearish bias than not in the currency,” Lynch said.
Euro bears were keeping one eye on the euro and a possible sub $1.3500 close and the other eye on the Swiss franc and whether dollar-Swiss, currently at Chf0.9024, can close above the psychological Chf0.9000 level.
The last time the dollar-Swiss closed above Chf0.9000 was February 12.
Dollar-Swiss peaked at Chf0.9037 June 5, the day of the larger ECB easing, so that will be the next hurdle, traders said.
Beyond that, lurks the January 23 highs near Chf0.9134 and the 2014 high of Chf0.9156, seen January 21, they said.
Credit Agricole strategists were not yet convinced that the day of the dollar had begun, especially versus the euro.
“In the month ahead, we expect the euro to be more resilient to carry pressures versus the dollar,” they said.
“This resilience will be facilitated by ongoing capital inflows into European bond markets and a rebound in relative equity performance,” they said.
While Credit Agricole continued to see these drivers turning against the euro in Q4, “an earlier move seems premature,” they said.
Credit Agricole has lowered their September 2014 forecast to $1.3700 from $1.3900 prior, their December 2014 forecast to $1.3200 from $1.3700 and their March 2015 forecast to $1.3000 from $1.3200.
In terms of positioning, Friday’s CFTC data showed that speculative accounts had a net euro short position of -62,846 contracts as of July 15, compared to the prior week’s net short of -59,256 contracts and the net long of +32,551 contracts, seen as of May 6.
Net positions under 100,000 contracts are not deemed extended.
The record net euro long was +119,538 contracts May 15, 2007, and the record net euro short was -214,418 contracts, June 5, 2012.
Global investors inflows have been behind the euro’s resilience up to now, noted Marshall Gittler, head of global FX strategy at IronFX
“One of the reasons EUR has been so well supported has been U.S. buying of European stocks, but as European markets decline, those flows are likely to reverse, dragging EUR/USD down,” he said.
Already, there has been some profit-taking on eurozone equities.
Bank of America Merrill Lynch’s monthly fund managers survey, taken July 3-10 and released July 15, showed that a net 35% of managers were overweight eurozone stocks this month, down from a net 43% overweight in June, which was the second highest overweight since July 2008, and compared to a net 36% overweight in May.
The German DAX closed up 1.27% at 9,734.33 Tuesday. At the close, the index was down 1.9% year-to-date and down 3.2% from the 2014 high of 10,050.98, seen June 20. In contrast, at the new record intraday high of 1,986.24 posted earlier, the S&P 500 was up 7.5% year-to-date.