High conviction contrarian - where to sell EURUSD this week?

Perhaps the market has already gone some way to pricing in a dark scenario. EU nat gas prices have had a dramatic shift higher, but inventory levels are high and should see Europe through the winter - this view would be re-assessed if the Nord Stream 1 pipeline doesn’t resume full flow on 2 Sept, or we hear of bitterly cold weather patterns emerging.

Either way, EURUSD is finding a bid, although a deeper dive this is more a USD story than broad love for the EUR – case in point, EURAUD has smashed through multi-month support at 1.4370 and short EURAUD is the best momentum play at this point - even EURGBP holds a range of 0.8500 to 0.8400. EURJPY is -0.4%.

Part of the USD selling can be explained by a stronger CNH (yuan) and it feels like a lower USDCNH is driving the show today – a new round of stimulus from Chinese authorities and a far stronger PBoC CNY (yuan) ‘fixing’ (at 11:15 AEST) has seen USDCNH trade lower and this has resonated in USD selling across the board.

EURUSD 1-week implied vol sits at 10.28% which is the middle of its 12-month range and implies a range of 1.0094 to 0.9859 over the week from current spot prices.  While the 1.0110/20 area certainly interests, if the USD bears really make a play into next week, the key area to look for supply and possibly counter-moves is 1.0190 to 1.0200 – this is where we see the top of the channel EURUSD has held throughout 2022 and the 61.8% fibo of the recent 1.0368 to 0.9900 sell-off. If it is to get to test either of the range extremes then it may take few days, but this the higher probability fade zone.

On the skew side, EURUSD 1-week call volatility trades in line with put vol so the options market is fairly balanced on where the next move plays out – ahead of Powell’s speech at Jackson Hole (JH) positioning will be key and again we see the market running a decent long USD exposure, certainly from leveraged funds. Our own client position is currently short USDs, with 66% of open positions in EURUSD held long – retail is often uber aggressive and contrarian, but there is a general bias for the USD to run lower into JH.

One to watch, but rallies into 1.0190 would be where the elastic band snaps back, but this would be driven by the market reducing positioning into and post-JH and importantly a lower USDCNH.