The Euro has been range bound for nearly 18 months; stuck between $1.06 on the low side and roughly $1.17 on the high side. While the Euro remains stuck, now trading a little over $1.10, there has been growing interest by the commercial traders to own the Euro following the Brexit vote.
Heading into the vote, commercial traders had withdrawn from the markets. We saw this across the currency and interest rate markets, as it was clear that even their contacts couldn’t forecast the outcome with any degree of clarity. In fact, commercial traders nearly halved their position size in the months leading up to the vote. Today, we’ll focus on their return to the market and use their purchasing power to bolster our own position as we attempt to buy a turnaround in the Euro.
The commercial traders have increased their total position size by nearly 20% since the vote and their net position has grown more bullish by nearly two-thirds. What this means is that following the vote’s outcome, the business managers of multinational corporations who hedge their currency risk decided that the Euro is oversold on a relative basis to their collective models’ valuation in a post-Brexit world. Our operating thesis has always been that no one knows the markets they trade like those whose livelihood’s depend directly on the forecast of their given market. Furthermore, we eliminate outliers by using the collective consensus of the commercial trader population as a whole. These are the people who sit on each other’s boards and have access to the best information possible and collectively call the shots.
Based on their buying, we’ve seen commercial trader momentum shift into positive territory. This alone puts us on the lookout for buying opportunities. When combined with five straight weeks of commercial net purchases, we really start looking for buying opportunities and now, it looks like we have one.
Our market momentum trigger just signaled a reversal. We sent the buy signal out last night in our Discretionary Cot Signals with a tight protective sell stop to be placed at Friday’s low of $1.0976. While not 100% convinced that the bottom is in, the risk to reward profile makes this trade an attractive starting point in building a long Euro currency position inline with the commercial traders’ future outlook. We believe this market could easily pop towards $1.12-$1.13. This keeps the market range bound while still providing significant incentive as we’re only risking less than a full penny on the trade from current levels.
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