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EUR/USD Following the Paris Attacks – What’s Next? –

EUR/USD is on a downwards path, but it’s quite choppy to say the least.

What do the horrible attacks and risk aversion mean for the pair? The team at Nomura answers:

Here is their view, courtesy of eFXnews:

Last week, Nomura discussed its outlook for EUR/USD arguing that the pair could test 1.05 going into the FOMC December 16 meeting, and that it’s finally realistic to project a move to parity within the next 3-9 month. Today, Nomura follows-up with a note on the current dynamics of the relation between EUR/USD and risk-aversion and what this means for the pair’s price action and direction in the near-term.

“Obviously, we are facing a particularly sad version of this right now (given tragic events in Paris). Regardless,even before the events of Friday night, there was a break in the behavior or EURUSD versus risk assets. The Bloomberg chart below simply shows EURUR along with an inverted version of the S&P future.

Many of the spikes in EURUSD in recent months have coincided with risk aversion (S&P down, i.e. yellow line up), But  over the last few sessions, we have seen a continued decline in EURUSD, despite the S&P dropping sharply,” Nomura notes.

EUR November 16 2015 chart

What is going on? Nomura provides a couple of possible explanations:  

“1- The market may now view monetary policy divergence as so ‘set in stone’ that risk aversion matters less for monetary policy pricing and FX.

2- Repatriation flows, from EM and into the Eurozone may be slowing (after being sizeable during Q2-Q3). (This explanation fits with EM being more resilient to US led equity weakness too in recent sessions),” Nomura argues.

The bottom line There are good reason to think that we can finally trade towards parity in EURUSD in coming months. If risk aversion cannot support the Euro, even temporarily, we can potentially get there faster,” Nomura concludes.

The strategy: “We have added short EUR delta in the form of 6-months 1.02 digital puts last week, and continue to look for short opportunities in EURUSD spot,” Nomura advises.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.