I have been on the sidelines and lacking conviction for the past two weeks.
First, I was expecting the US economy to fall harder and faster. More importantly, the Merkozy ‘promise to deliver a plan’ on Oct. 10 generated a 500 pip rally that left me scratching my
The headline risk surrounding this Sunday’s EU Summit became enormous. Yesterday’s Guardian article saying “France and Germany have reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a “comprehensive plan” to resolve the sovereign debt crisis.”
Aside from the numerous examples of bad grammar in this story (reached agreement?) there has been a wave of denials that has me convinced this story is bunk. The nail in the coffin was a WSJ report saying a bond insurance plan would be illegal under Europe’s no-bailout clause.
In addition, expectations are being ratcheted down for European bank recapitalization. The Greek bailout is fully expected but disappointing periphery growth is not.
It’s very difficult for me to price in what’s expected from the European Summit but betting against European policymakers has been the best trade of the year. Merkel and Finland’s PM today tried to scale back expectations but the market isn’t listening.
In addition, sentiment data remains negative. I’m a big believer in the University of Michigan consumer sentiment survey as a leading indicator. Last week, it was once again near a 30-year low and the lowest non-recessionary level ever.
I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.
In Outcome 2, we may see the euro rally on the news. I believe this will be short-lived and an incredible opportunity to sell.
My plan is to sell EUR/USD now with a stop at 1.3936. It’s a wide stop, at almost 180 pips but I’m targeting a drop back to 1.32 – a 560 pip reward. I’m also prepared to add to this trade in the high 1.38s.