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By HaleStewart December 30, 2013 5:32 pm
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Revisiting the Double Top For the EUR/USD Thesis

Last week, I wrote an article tiled, Double Top for the EUR/USD?  In it, I advanced the thesis that a convergence between technical factors (which tell us when to buy) and fundamental factors (which tell us what direction to trade a currency pair) had occurred.  The technical factor was obviously a double top while the fundamental factor was the change in the US (which is growing at a stronger clip) relative to the EU (which is facing potential deflation and is clearly in a slower growth mode).

In the article, I made the following statement regarding the validity of the thesis: Central to this thesis is the need for prices to remain below the trend line connecting November and December lows.  As the chart below shows, we are close to that situation:

 

So – is there any reason we should consider keeping a short on in this environment?  Consider the following points:

  1.  We are in a very slow-trade environment; most traders have closed their books for the year, meaning market movements may be more pronounced.
  2. What started the rally was a statement from European Central Bank Governing Council member Jens Weidmann to the effect that deflationary pressures were no reason to keep rates low.  However, how realistic is the possibility the ECB will raise rates anytime soon?  Unemployment is over 12%.  France just printed another quarter of negative GDP growth.  Deflation is in fact a potential threat to the economy as the YOY percentage change in CPI has decreased by half over the last year.  In fact, the ECD just cut rates 25 basis points because of this very threat.  In short, the fundamentals don’t provide any support for a ECB increase right now.
  3. The US printed a disappointing pending home sales index (.2% versus a 1% expected rate).  As housing has been a strong part of the US economy, this disappointment led to a dollar sell-off, most likely exacerbated by the weak liquidity this time of year.

In short, the fundamental story still plays.  The problem is technical – a failure of a double top formation.  But this type of failure is present in all technical analysis.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

 

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