Insight & action

The Gift That Keeps on Giving: This Euro Bet

The gift that keeps on giving: Sell the euro above 1.37.

This trade has consistently made money for Citigroup clients who've paid attention to the the firm's FX strategist Valentin Marinov. Once again today he's advising clients to sell the euro, based on three relationships suggesting it is overvalued.

We first highlighted Mr. Marinov's analysis on October 29 of this year. The euro was 1.38 ahead of the European Central Bank meeting where ECB Chief Mario Draghi reiterated his dovish stand on rates, and 10 days later it had fallen to 1.3360. This go around, better economic data here in the United States has sparked money mangers surveyed by Bloomberg to shift forward their timing on taper (which would be bullish the dollar, negative the euro). So different catalysts, same expected result: A lower euro.

As the euro hits 1.3721, we share three charts Marinov presents this morning to clients, starting with the euro versus Europe's economic data. The euro tends to trade in- ine with economic conditions, as one would expect. Presently, the two have decoupled.

Europe's economic data has been worsening compared with that of the U.S., arguing for greater life support from the ECB than from the Fed. More life support implies more euros injected into the banking system. This is also negative for the euro. Curious the euro has rallied back towards 1.38 even as the bank stocks present a very different picture... Mr. Marinov's Reason No. 2.

Finally, 2-year forward exchange rates are deteriorating. If traders expect a weaker euro in the future, they should be less willing to hold euros now.

Marinov tells clients to expect a move down to 1.3450. As for timing, he cites the Fed meeting December 17 as a likely platform for accelerating "taper talk" based on recent US employment gains.

The gift that keeps on giving? We think so. Call it an early Christmas present from Citigroup.

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