I’ve alluded in recent weeks to a pending decline in the euro. The fundamentals — particularly U.S. versus Europe — easily suggest the euro will eventually fall against the dollar.
From a trader’s perspective, though, I’ve been on the sidelines. I haven’t touched the euro since I grabbed a profit on a spike of euro strength last month. Since then, I’ve been tempted to go short — betting on a decline — but I haven’t.
Why? Because the trade seems too obvious. Those who follow me know I don’t like obvious trades. Chances are, you’ll lose money on most obvious trades.
I mention this because I saw a frank comment at the end of a front-page Bloomberg article this morning. The story encapsulates the sentiment of many, me included: Dollar Seen Casting Off Euro Shackles as Fed Tapers. Here’s the comment: “Don’t worry, guys, the FX core banks will ensure [that the U.S. dollar will] move in precisely the opposite direction in relation to ‘logic’!”
Now, I’m not sure the “FX core banks” can ensure that. But market psychology sure can. If too many have already bet the U.S. dollar will rise, then sellers will likely outnumber any new buyers, and therefore pressure the price of the U.S. dollar lower (and the euro higher).
Today, the euro is getting smashed. That fits in nicely with the theme of the Bloomberg article. It also fits nicely into the U.S.-dollar-as-safe-haven storyline.
I find it hard to argue against that theme. But that doesn’t mean prices can’t “defy logic” even longer. The trade, especially today, still seems obvious. The euro is pulling back toward a confluence of technical support, according to my charts.
It may be tempting to short the euro. But since I think the eventual downturn will be lasting, I’d be careful not to jump in too early … when everyone is expecting dollar strength.