A New Clue to the Euro's Direction

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Looking for a euro-dollar trading strategy among the torrent of European news reports?

Here's an idea.

Patterns play a big part in currency trading, and here's a good one: the link between the size of the Eurosystem's consolidated balance sheet and the euro-dollar pair.

Alan Ruskin, global head of G-10 FX strategy at Deutsche Bank, looked at the relationship between the three-month growth rate of the balance sheet and the euro-dollar pair and found an 84% correlation. When the balance sheet expands, the euro weakens, and vice versa. Take a look:

That's nice - but since the two are just moving in tandem, rather than one reacting to the other, it's not so easy to use the relationship for trading strategies. Unless...the European debt crisis is to be solved by some kind of balance sheet expansion.

Ruskin thinks it is. Either the stabilization fund will be leveraged, he says, or the central bank, under its Securities Market Program, will continue buying debt of the periphery countries to prop up those economies. "In other words, most roads, without immediate sovereign ratings implications, lead to a continuation of the ESCB’s balance sheet expansion," Ruskin wrote in a note to clients.

If you agree with Ruskin's analysis, and you have these numbers, well, your trade seems pretty clear. Get busy.

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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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