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Busch: Don't Believe the European Central Bank Hype

On Fast Money yesterday, I put forward a trade to sell the euro and buy US dollars .

This was based on several aspects that I reviewed in the Busch Update/CNBC Money in Motion blog on Monday.

My point was that the markets are expecting aggressive action by the European Central Bank to raise rates as soon as April and the currency markets have bought euros based on that assumption. Currency traders have ignored several serious problems within the euro zone. They have built up the largest long positions since 2008.

With that in mind, I devised a strategy to take the other side of this environment.

Here’s the analysis and trade:

Dollar and Euro
Dollar and Euro

The U.S. Commodity Futures Trading Commission said net short dollar positions totaled $34.9 billion for the week that ended Tuesday, the highest value since June 2008. Euro net long positions hit 51,308 contracts, the most since January 2008.

There have been 3 similar examples of traders' commitment above 48,000 since 2008.

This is what happened:

01/08/08: Euro longs hit +50,000 and the euro traded in a range from 1.4380 to 1.4950 until the week of Feb 29th, but eventually broke out to an upside high of 1.6020 in the week of 7/18/08.

10/06/09: Euro longs hit +50,000 and the euro traded in a range of 1.4625 to 1.5150 until the week of Dec. 11th, when it broke down and traded to 1.1900 in the week of 6/11/10.

10/05/10: Euro longs hit +48,000 and the euro traded in a range of 1.3700 to 1.4280 until the week of Nov. 12th, when it broke down and traded to a low of 1.2870 in the week of 1/14/11.

Here is a medium term trade with lots of opportunities to adjust the entry point.

  • Sell Euros at 1.4000
  • S/L at 1.4300
  • T/P at 1.3400
  • Risk 300 points to make 600 points.

One last thing: next week is the Federal Reserve meeting and there have been reports of more FOMC members (Fisher, Lockhart, Evans) questioning the current QE2 program. If the Fed indicates in its announcement that the economy is recovering faster than they previously thought, this will further aid this trade.

CURRENCY FUTURES:

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

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