Euro pain, Australian and New Zealand dollars vulnerable

EUR appreciation has been painful for many, especially those looking for a turn in the currency over recent days. Unfortunately, for these investors, the EUR may yet strengthen further in the short term before any reversal is seen. Indeed, using valuations to justify a bearish view may not be a particularly strong argument at present given that the EUR trade weighted index is trading close to its historical average level while IMM data reveals that the speculative market remains significantly short EUR.

Additionally, my quantitative models reveal that the short term ‘fair value’ for EUR/USD is close to 1.40. While longer term fair value is undoubtedly much lower, it could take some time before the EUR declines to such levels. This is not encouraging news for EUR bears but there are some signs that the upmove in EUR/USD may not persist. Currently EUR/USD is trading above its 100-day moving average but since July last year, it has failed to remain above its 100 day moving average level for more than a few days.

There are definite signs that commodity currencies are topping out. Both the AUD and NZD have failed to extend gains over recent weeks. Perhaps valuation concerns are finally begging to catch up with these currencies (both are close to 2 standard deviations from average purchasing power parity while my quantitative models reveals a divergence with short term fair value) while speculative positioning according to IMM data remains at high levels. AUD and NZD even look stretched relative to interest rate differentials.

A wider than forecast January trade deficit in New Zealand did not bode well for the NZD but near term direction for both currencies will still depend on the gyrations in risk appetite given the strong correlation that both AUD and NZD have with risk aversion. Notably the the improvement in risk appetite has stalled in February, leaving AUD and NZD exposed to lofty valuations.

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