Long

EURUSD bottom of current trend channel

Updated

I'm not normally a currency trader, but I do take a look at them here and there along with U.S. bond yields, I drew this trend channel awhile back, and now it's looking like there's a good chance EURUSD reverses back to the upside here soon.

To further the basic idea here, in a couple weeks we will have another FOMC meeting, and based on the way the 3 month treasury bill has been trading lately, a nice peak above 5.4% in June, yield briefly coming back down, then back above 5.4% headed into July and has pretty much stayed there this whole time. Longer term note and bond yields have starting to creep towards the 3 month. I use the 3 month as the closest indicator of what the Fed will end up doing with its federal funds rate. If the 3 month stays as quiet as it has been for another two weeks, expect the fed to "skip" hiking this round once more.

If that ends up being the case, that will only add fuel to the long Euro position in the short term.

Then I had a thought occur to me, there's got to be an ETF that represents this trading pair for those accounts that don't do forex, and sure enough, there is. And it has options. FXE. I think I may go ahead and dabble going long calls on the off chance I'm right and this bounces in the coming weeks.

Note

Well, it had to go and prove me wrong, go under that lower trend line. But after two days in a row of bouncing off a similar price point, it does look like it might be finding support. I do think a reversal is imminent, but it's possible the above channel is no longer tradable.

The ensuing rally I think is due to happen soon might possibly not reach all the way back to the upper trend line this time before reversing course back down again. Regime shift out of this channel to something else is likely.

But again, I do think we are just on the precipice of Euro wanting to go back up relative to the dollar for at least a couple weeks. Depending on what I see tomorrow, I may pull the trigger on calls then. If it dips early once more and seems to find support at either a similar or higher level than the last two days, it's worth nibbling.

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I do have to add that DXY makes the dollar strength look stronger than the EURUSD chart seems to suggest. So, I'll keep an eye on DXY too, if I see any signs of weakness there, pulling the trigger on FXE calls. I'll be patient and try to pick a safe spot to get in for the reversal.

Note

I still think we may see a reversal to the upside for the Euro for the short term, but it's possible it will be something akin to a last gasp of the general up trend channel that I drew. I wrote a little more in-depth on a pretty good divergence that can be signaled by subtracting EU05Y from US05Y (US05Y-EU05Y).

US05Y-EU05Y difference in bond yields as advance warning

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Redrawn channel from a slightly different perspective as the price fell out of the bottom of my original channel. Maybe this ends up being more tradeable for now.

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I should add to the above my redrawn lines were inspired by looking at things from the reverse perspective, both at and USDEUR. Helped my brain see it a little differently.

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Well, just peaked at dollar index futures tonight, and the gap down on the open tonight definitely makes the long Euro trade look hopeful. Gap up if you check Euro FX futures. And, just to be sure there wasn't any change of contract shenanigans throwing me off, I checked the back month as well, similar gap up for Euro (down for dollar).

Here's hoping there's good follow through the next couple weeks to help my calls! is not very liquid with its options, so I had to buy the ask and will likely have to sell on the bid when I get there, but if the move is big enough, it won't matter. The profit will hopefully be pretty tidy.

Note

Trade looking pretty decent so far. I probably should have waited for a lower low divergence on US05Y-EU05Y before entering, but so far it's working out. Hopefully keeps up.

Another thing to note is ECB meets this week to decide on if another hike is necessary, and we get U.S. CPI report, both of which can cause a decent sized move in a short time in either direction, then the Federal Reserve follows with its next FOMC meeting next week.

The general trend and feeling is that the ECB may need to hike once more, due to stickier than the U.S. inflation, and the U.S. federal reserve being more likely to skip hiking at this meeting, it feels to me like there could be a large divergence in the next two weeks between EU and US bonds, sending Euro higher.

For a good visual, here's a comparison of EU core inflation vs. US core inflation, found on tradingview as and respectively.

Note

As for longer term US bonds as represented by , there's a bullish reversal that seems like it might be ready to start. Bond values go up, yields go down, which would be good for the Euro bull case in relation to the dollar.

Although, I suppose the real question is, how do the treasury yields uninvert? Will the longer term ones need to keep climbing to meet the short term? Or will it wait until the short term ones finally start coming back down?

Q4 this year into Q1 next year, I think we find out.

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It's been a slow grind so far, but Euro is remaining higher than my entry. There's a nice divergence on the 5 year notes, the U.S. having dipped more significantly than the EU, which is adding to Euro strength. It's looking more and more like a pattern shift is starting to emerge in the treasury yields. They're seemingly hitting a wall for the time being and yields aren't pushing higher very easily at the moment.

We'll see what the ECB says tomorrow, hopefully more good news for the long Euro trade that I'm in for about the next month.

Note

I was definitely early to this trade. Obviously we've had another leg down, and even my revised lower trend line has been broken through now.

I probably should have waited for US05Y-EU05Y to show a more obvious lower low divergence before entering the trade. It still hasn't, but the has gone up much more aggressively the last couple trading days vs. the US05Y. Maybe we're putting in the bottom now?

I'm not going to say with any strong conviction after already burning myself entering too early, but I am holding my position with the general feeling that EU yields will remain stronger than US yields for the next few weeks at least.

The ECB last week did hike again, the Federal reserve here in the U.S. has its FOMC meeting presser on Wednesday before close, there are numerous indications that they will skip hiking this round. The way the US03MY trades lends credence on top of things that macro guys track for rate hike expectations.

If that pans out, that should hopefully help the Euro strengthen heading into October and maybe the trade will come back to me. We'll see!

Note

Zoomed in on the 4 hour today. Obviously overnight and into today, the US treasuries have gone up a little more aggressively than their Euro counterparts, and you can see the Euro dipping back down some after a nice rally for a couple days.

We did technically set a lower low on the 4 hour, but only just barely. On September 13, the difference between the US and EU 5 year was 1.718%, early this morning it tapped 1.717% before the U.S. 5 year started going back up more aggressively than Euro and widened the gap again.

What I'd really like to see is a lower low than we had on August 30, which was 1.667%. If we can see the difference between and break that level again, things will be looking very good for a Euro rally.

The U.S. bonds are indeed showing signs of slowing with Euro wanting to continue up some, but not enough to make this trade pop just yet. Here's to hoping the next high we see on US05Y-EU05Y is under 1.8% (most recent high, which is lower than what we had in August). That will be another solid indicator of a trend shift of US bond yields slowing their upwards trajectory while Euro has to continue up.

FOMC meeting tomorrow, once again with the widely held expectation that they will 'skip' hiking this time. There probably needs to be some more quantitative tightening to help out the trade as well.

This year, the EU has actually been a good bit more aggressive on its tightening:

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Post FOMC presser, movement in treasuries certainly not helping the long Euro cause today.

Higher high on US05Y-EU05Y than where we've been in recent weeks, but, we also didn't break the more recent low in EURUSD at the same time. Maybe a small glimmer of hope that the Euro reversal may yet arrive in the not distant future. I was certainly too early to the party here, though. Too contrarian for my own good somedays.

If we can keep the difference between the 5 years under 1.89% in the next week or two, (most recent high in the difference between the yields) we might be OK and hopefully see some relative Euro strength vs. US.

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This is a signal I should have waited to see prior to entering the trade. Another big peak/high on US05Y-EU05Y, but lower than the previous big spike.

Drew a red line peak to peak to illustrate the divergence that should ultimately be bullish Euro. It's also possible it still experiences some more downside next week before reversing course.

Note

Zooming in some more, drawing down channel trends, the two most recent lows are showing signs of slowing the down momentum for the Euro.

I was definitely early here, but there are increasing signs that this may yet turn around.

Note

I've basically written my trade off at this point. I haven't closed it, but it's become virtually worthless to the point where I won't even bother with trying to close it unless it has a miraculous rally.

Here's how we're looking, though:

Difference between US and EU 5 year have widened again today, EURUSD went down more. We're still below the previous couple of big spikes. Basically just waiting and watching to see if we don't press that gap bigger than the more recent highs in the US05Y-EU05Y.

If we can set a couple successive lower highs, it may bode well for it to finally turn around. It was about this time last year that it finally made a healthy rally back after getting destroyed most of the year. There were successive lower highs for a few months before the Euro had any significant rally back. Highest high way end of April 22, next major high that was a little lower was August, the last was October, at which point the Euro had already come back up from its ultimate bottom, but immediately after that October peak was a major rally where it went from just under a dollar to $1.10 the following couple months.

Next update I'll talk some about yield curve inversion and how both EU and US may eventually un-invert.

Note

Looking pretty good with the follow through on the lower high on the US03Y-EU03Y today. We'll see if bonds keep trending this way where the U.S. maybe slows down treasury issuance but the EU keeps going for a little while, at least.

But for sure, full stop, I should have waited for confirmation that the following big spike in the difference between the yields was indeed a solid lower high than the previous one at a minimum.

I saw the potential developing, but was way, way too early. Today may have been the spot to go long Euro.

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It may also be prudent to wait to see a lower low on the US03Y-EU03Y as well. So, if we see in the coming days that we set a lower low than the one circled in the zoomed in chart below, that may be the spot to really go for it, or the retracement that follows it.

Still could be early! But for sure, we seem to be beginning the shift that may favor the Euro for the coming weeks.

Note

Well, Euro price action is finding support, but the difference between the 3 year yields still is making bearish divergences for the Euro. I won't be putting on a trade here until I get better confirmation in US03Y-EU03Y or US05Y-EU05Y of an obvious bullish divergence. Certainly possible for it to continue trending sideways to down until the yield movements start to truly go the Euro's way.

dieseldub

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