E Euro Makes A Bid For A Bottom

Three weeks ago, the euro (FXE) made a three and a half year low against the Japanese yen (FXY). At the time, I thought the plunge was a warning sign. Instead, EUR/JPY shot nearly straight up from that point and even pulled off a breakout above resistance at its 50-day moving average (DMA).

Euro against the Japanese yen (EUR/JPY)

After seeing this performance, I am starting to wonder whether the euro is making another bid for a bottom. Sure enough, the euro looks like it is breaking out from a 3-month consolidation pattern against the Swiss franc (FXF). EUR/CHF is coming off a near 5-year low.

EUR/CHF is breaking out from a 3-month consolidation period

Why does the euro matter? During the stock market crash in March, the euro soared presumably as traders rushed to close out carry trades shorting the euro. This time around, a euro rally might be part of a larger risk-on trade with the U.S. dollar as the target for carry trades. EUR/USD is already breaking out above its downtrending 200DMA. If this breakout gets confirmed with an even higher close, I will assume that a greater risk-on trade is underway. I will also need to close out short euro positions, and I am moving to accumulate a long on EUR/CHF. Already, emerging market currencies have made big gains in recent weeks against the U.S. dollar (UDN). So, it seems the signs of a fresh euro bottom are converging and reinforcing each other.

Full disclosure: net short the euro

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Comments

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Barry Glassman 4 months ago Member's comment

Everything is so volatile now because of COVID-19, I'm not sure how any one can make informed decisions... there's just so much we don't know about this horrible virus.

Dr. Duru 4 months ago Author's comment

In this particular case, the currency trades are short-term in nature and look to follow the existing trend. But times of high uncertainty generally offer the biggest investment opportunity as those who have little to no confidence in the future are willing to sell at steep discounts.

Barry Glassman 4 months ago Member's comment

Makes sense. Thanks Dr. Duru.