Keep Selling Euros - by Kathy Lien
The European Central Bank's decision to start buying government bonds took a major toll on the EUR/USD. The currency pair lost more than 4.5% in a matter of days with the move exceeding our initial 500-pip target. After such a fast and sharp decline, a rebound like the one seen on Monday is not unusual and expected especially given the massive amount of short positions in the euro. An increase in German business confidence helped the euro recover from its initial post Greek election decline but we believe the gains will be short-lived and investors should continue to sell euros. The electoral victory by the Syriza party raises medium term problems for the euro. The opposition ran on an anti-austerity campaign that is great for voters but terrible for creditors. As the country runs low on cash, Prime Minister Alexis Tsipras' will need to restructure the country's loan agreements quickly. Tspiras wants part of their debt to be written off but their creditors, which include the ECB and Germany refuse to do so. If a new agreement is not made, its creditors could withhold the next bailout payment and Greece could face default. Of course, the Eurozone and the ECB have a lot to lose if Greece defaults because the central bank is tasked with maintaining financial stability and this would wreck havoc on European assets. In response to the Syriza party's victory, bond yields in Europe jumped, reflecting increased uncertainty and ongoing risks for the euro. At the same time the upcoming FOMC meeting should keep the dollar bid. If the Fed leaves its monetary policy statement unchanged, the dollar will rise, sending the EUR/USD pair lower (more in the dollar portion of our commentary). Even though EUR/USD has fallen from 1.1650 pre ECB to a low of 1.1098 today, Quantitative Easing can mean even greater losses for a currency. Remember, the first round of QE from the Fed led to a 900 pip decline in USD/JPY over the course of 3 weeks and the QE announcement from the BoJ last year drove USD/JPY from a low of 109 to a high just shy of 120 in 6 weeks time. This means there is additional room for the EUR/USD to fall. If 1.1200 is breached again, we could see the EUR/USD hit and most likely break 1.10.