How to Trade the European Economic Outlook
It's harder than ever to trade on headlines from Europe. Here's a way to profit from the region's longer term prospects.
Got whiplash? It's almost painful to watch the jousting in Europe. Underneath the minute-by-minute news, though, it's becoming clear that the economic outlook for the euro zone is less than rosy - and that presents a trading opportunity.
Robert Sinche, global head of currency strategy at Royal Bank of Scotland, thinks Canada's growth prospects outshine those of Europe right now, and he argues that the euro/Canadian dollar pair is currently trading about two cents below the "fair value" spot rate based on that outlook. So he recommends selling the euro against the Canadian dollar.
Why not the greenback? After all, the Fed this week declined to cut rates, while the European Central Bank took them down 25 basis points - an obvious indication of relative economic outlooks.
Sinche points out that euro-dollar has become very closely correlated with the S&P 500, and with the stock market bouncing on every headline from Europe, trading euro-dollar is effectively trading on risk sentiment. Euro-Canadian dollar is almost completely uncorrelated with the stock market's moves, however, he says, and "in that context alone, EUR/CAD positioning deserves attention." Add in the cyclical outlook, and you've got a trade.
Sinche wants to sell the euro against the Canadian dollar right around 1.3925 with a stop at 1.4380. and a target of just under 1.28.
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Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.
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