LONG AND STRONG - Ok so September is finally here and we can get back to fuller trade. The lighter July and August months are behind us and there is plenty of volatility to look forward to into the September through December months. One currency which stands out at the moment is the Euro. The single currency has been beaten down across the board over the past several days, with EUR/USD dropping to fresh yearly lows below 1.3200. I started buying some Euro below 1.3200 last week and now have a long position at an average cost of 1.3165. Technically, the market is well oversold on the daily chart, and considering a lot of the weakness came in some very thin and questionable market conditions, I like the idea of catching a bit of a bounce this week.
EVENT RISK AHEAD - Fundamentally, the Euro has been pressured by comments from ECB Draghi last week that the central bank would be prepared to further accommodate monetary policy. The Euro was already under pressure ahead of the comments, but the comments only intensified the selling. Still, it just seems as though markets may be getting a little too ahead of themselves here and we could be dropping a little too far, a little too fast. The ECB is scheduled to meet later this week and this will be one of many central bank rate decisions on the docket. But as many traders return to the desks and as participants start to prepare for the meeting, I wouldn't be surprised at all to see some profit taking on recent shorts in order to square up ahead of the risk, just in case Draghi's rhetoric is not backed up. So technically the trade is due for a bounce and fundamentally, it seems we could see some profit taking ahead of the event risk.
TRY THIS ON - The Euro has been sold aggressively across the board, and if you aren't too keen on buying EUR/USD but are also not optimistic with the overall risk picture, you may want to consider looking at EUR/AUD. This market has been under pressure all year and has now settled back into a critical support zone around 1.4000. There is some formidable previous resistance turned support from 2011 around 1.4000 and if we pull back the chart 5 years, we are able to see the formation of a potential longer term base. As such, this pullback could just be a corrective decline in search of a longer-term higher low ahead of the next major upside extension. At a minimum, with daily studies oversold and equities potentially at risk for another round of liquidation, the idea of a long position over the next several days could prove to be quite profitable. On the downside, there is a negative carry with this long position, but if the timing is right, a quick jump higher from here will more than offset any loss from the negative rate differential.