Maybank FX Note: EUR - Trade it Like a Funding Currency - 24 Jun 2015

EUR: Trade it Like a Funding Currency

        EUR took a turn lower (breaking below 1.12-handle, traded an overnight low of 1.1135; last at 1.1175) amid strong discontentment from Greek politicians (Syriza party members) amid broad USD strength overnight.

        It appears that a pattern may have emerged – when German equities goes up (risk-on sentiment), the EUR heads lower and the vice versa is true (See Figure 1 & 2 below). While it is hard to unlearn market convention (risk on, buy high like beta currencies like EUR, AUD), but it does appear that EUR has regained its funding currency status in this environment. It may sound odd but price action suggests so. Reference this observation to the ‘general rule of thumb’ of selling JPY in risk-on environment and buying JPY in risk-off environment (See Figure 3). Without doubt, both the EUR and JPY are in the midst of conducting QE.

        So if we get a Greek deal, post-deal (risk-on) sentiment could see a rally on risk assets (DAX included), and that suggests EUR could head lower, the reverse is true as well. That said we will continue to watch DAX (as a proxy of risk sentiment) and Greek development (driver of risk sentiment) and trade EUR (as a second derivative to the proxy). We mentioned that while Greek had worked out a proposal, this is pending approval from the Troika (which is expected to meet again on Thurs ahead of the Council meeting). Even if the deal is on, Greece could potentially face political backlash from its own party (given that the mandate given to the ruling party (Syriza/ PM Tsipras) is anti-austerity. We continue to caution for choppy price action amid thin liquidity especially during Asian trading hours. Next support targets 1.1130 (50 DMA), 1.1060/80 levels (100 DMA and 38.2% fibo of 1.1467 – 1.0819). Resistance at 1.1220 (61.8% fibo) before bigger resistance at 1.1467 (May 2015 high). (See Figure 4)