CORE POSITION TRADE
TRADE REFERENCE CP36:
DATE: 18th August 2023
PERIOD: Q3 2023 thru 2024
CURRENCY PAIR: EUR/USD
TRADE DIRECTION: LONG
REASONS and THOUGHTS BEHIND THE TRADE:
I have tried twice already this year to post this CORE POSITION trade. On both occasions, latterly in March I used CP35. I have decided that maybe using the next number CP36, I will have better luck with a “trigger” this time.
I have left my initial thoughts behind the trade below but wanted to add the following given that a few months have gone by, since my initial thoughts were posted.
Right now, we are seeing uncertainty across many markets, including a floundering CHINA. We have possibly, probably reached the end of interest rate hiking cycles from most G10 Central Banks. In my opinion just one more across most of the board in September. We therefore have a KING USD$ scenario in play.
Central Bank leaders MUST remain hawkish otherwise equity traders will seize the situation and equities will be bought across the board and we will see inflation issues resurface once again. We all know what’s going to happen re equities it’s all a matter of controlling the narrative the best that it can be.
CHINA is the big unknown that most traders, myself included did not bargain for.
All in all, commodity currencies are under real threat, especially antipodean (AUD & NZD) this spills over into EUR crosses and affects the EUR moves. CHINA fuels the USD as well and despite all, I see an opportunity to hopefully enter long with this pair from lower levels.
Moving beyond Covid-19, we have basically exited a 13-year period of Central Bank accommodative policies with a zero-interest rate policy (ZIRP) both sides of the Atlantic.
We saw inflation...
Both the FED and ECB told us (the people) that inflation during and through Covid was TRANSITORY. It was NOT.
After the GFC in 2008-2009, we had what was called a “Race to the Bottom” vis-a-vis Central Bank interest rate cuts. We are now in a “Race to the Top”, rhetoric is at a peak as Central Banks fight rampant inflation which shows no signs of giving up. In fact, It is safe to say that Central Bankers are out of their comfort zones, they are trying influence factors that they simply cannot control such as WAGES RISES, INFLATED SERVICE COSTS, SUPPLY CHAINS, ENERGY & FOOD PRICES...
The only tools that Central Banks have at their disposal are: rate increases, Rate reductions, Quantitative Easing (QE) and Quantitative Tightening (QT)... when you look in isolation these are nothing more than blunt tools at the very best.
Looking at the FED:
With overnight rates currently sitting at 4.75%, the Fed STILL does not have control of inflation and the end rate (Terminal rate) is now being talked about being closer to 6.00%.
Looking at the ECB:
Overnight rates are currently 3.00% and the markets have priced two x 0.50% rate increases for the next two ECB meetings, with the end rate now anticipated to be 4.25% through to 4.50%.
At first glance this all sounds fascinating but there is a fine line between continually raising rates and stunting economic growth delivering a RECESSION. Both the US and EUROZONE are in my opinion RECESSION bound later 2023.
Nevertheless, following the EUR/USD journey to sub-parity at 0.9535 in September 2022, I believe that we are now past the “parity” calls and over time the EUR/USD should recover and move higher towards 1.2000 once again. This is therefore a longer-term position, and it could take all the way through what remains of this year and the next to get there.
There are RISKS of course.
The USD flight to safety move and the fact of the continuing hostilities in the UKRAINE. The ECB is however very HAWKISH for the first time that I can remember and for this reason alone I believe that we have the chance to get in on a trade close to the lows.
I have initially set the following: -
GLOBAL STOP 1.0270
GLOBAL LIMIT 1.1950
Looking at my TRADE PLAN, I can extend the GLOBAL STOP back towards parity and remain within the Monthly Average True Range. Right now, my thoughts are based around a RISK across three trades of about 700 pips with a REWARD that even with multiple limit orders along the way potentially could produce the CORE POSITION trade of the decade!
However today (8th March 2023), I need to see a break of the current support around 1.0520 and a dip lower below 1.0500 in order for this trade to trigger to the long side.