Euro Will ‘Relax’ Before Run Higher, FX Concepts’s Taylor Says

The euro will drop this week before recovering through the rest of February as banks begin to repay the European Central Bank’s second tranche of three-year loans, FX Concepts LLC’s John Taylor, said.

The shared currency, which has climbed 2.4 percent against the dollar since Dec. 31, may pull back initially as technical indicators show its recent advance has been too rapid, Taylor said in a Feb. 1 telephone interview. Declines may present an opportunity to buy the euro, he said. The currency gained this year as banks made early repayments of the first tranche of ECB loans taken under so-called Longer Term Refinancing Operations a year ago, shrinking the central bank’s balance sheet.

“We’re positioned for euro rallies and dollar weakness,” Taylor, founder and chairman of New York-based currency hedge fund FX Concepts, said. “The first LTRO flows are over, so we have a month before we have the next ones, and so in the first part of February the euro is probably going to relax and maybe go sideways to down.”

The euro slid 0.1 percent to $1.3504 as of 10:52 a.m. in Tokyo after dropping 0.9 percent yesterday. It reached $1.3711 on Feb. 1, the highest level since Nov. 14, 2011. The 17-nation currency fell 0.1 percent to 124.95 yen today.

Economists expected a total of 150 billion euros ($203 billion) in early repayment for the first LTRO tranche and 138 billion euros for the second, according to the median estimate in a Bloomberg News survey published Jan. 25. The first opportunity for banks to repay money from the second tranche, which amounted to 529 billion euros, is Feb. 27.

Technical Indicators

Against the dollar, the euro’s 14-day relative strength index was 76 on Feb. 1, above the 70 level that indicates to some traders that a currency has risen too far, too fast and may be about to reverse. It was at 61 today. Its RSI versus the yen was 79 at the end of last week and 70 today.

The euro fell against the yen, adding to yesterday’s decline which was the biggest since June, amid corruption allegations against Spanish Premier Mariano Rajoy and uncertainty ahead of Italian elections this month.

A poll showed former Italy Premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud. Voting takes place on Feb. 24-25.

The euro will probably drop between March and July as markets refocus on the “chaotic” political issues in Europe with Italian parliamentary elections on Feb. 24-25, Taylor said.

“The LTRO coming off will put more bidding into the market for euros, but the Italian stuff will put more selling and so I would argue that, as of March 1, the euro should be in trouble,” he said. It will probably fall to $1.20 “at some point in the year, but I don’t know if it’s going to end up there.”

The 17-nation currency has risen 2.4 percent this year, the biggest gain among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes after the Swedish krona. The dollar has slipped 0.3 percent.

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