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E-mini Euro FX Futures (Sep 2022)E-mini Euro FX Futures (Sep 2022)E-mini Euro FX Futures (Sep 2022)

E-mini Euro FX Futures (Sep 2022)

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E7U2022 trade ideas

FX Price Action Ahead on Growing Rate DivergenceLast week was busy for major central banks. During a 60-hour window, rates were set for 60% of the global economy, from the US Fed, the ECB, to the BoE. Central banks’ announcements caused a frenzy in markets. The pivot to a dovish stance by the US Fed contrasted sharply with hawkishness from the ECB. This paper summarizes rate announcements and their market impact. It also dives into Yen dynamics as the Bank of Japan (BoJ) meets tomorrow. CAUTION FX TRADERS: GROWING RATE DIVERGENCE AHEAD Renewed divergence in monetary policies was evident from rate announcements by the major central banks. After more than a year of moving in tandem, central banks’ stances are shifting. The Fed is signaling rate cuts sooner. Meanwhile, ECB and BoE insist that rates need to stay higher for longer to fight sticky inflation. As interest rates in the US remain elevated relative to other major economies, the Fed has ample room to slash sooner. Inflation in the EU has contracted at a rapid clip relative to the US. However, economists expect EU inflation to rebound in the near term with fading base-level effects. Inflation in the US is expected to average 2.4% in 2024 compared to 2.7% in the EU and 3.75% in the UK, as per respective central banks. The US economy is strong with robust economic growth, resilient consumer spending, and solid PMI numbers. FED HAS PIVOTED TO DOVISHNESS The FOMC opted to keep rates steady with their statement pointing to the end of the rate hiking cycle. Most notable was the Fed’s updated economic projections & dot plot. It showed faster-declining inflation, slower GDP growth, and faster rate cuts. The Fed’s dot plot of rate expectations guided towards three 25 basis point (bps) cuts next year. Markets were expecting five rate cuts before the Fed announcement. Following the Fed meeting, markets now anticipate six rate cuts. BOE REMAINS HAWKISH The Bank of England opted to keep rates steady with a hawkish pause. The BoE statement indicates further rate hikes if inflationary pressures remain persistent. “The full effect of higher interest rates has yet to come through, posing ongoing challenges to households, businesses and governments," ~ BoE Market Policy Committee ECB JOINED THE BOE WITH A HAWKISH PAUSE ECB decided to keep rates steady with a hawkish pause. ECB President Christine Lagarde asserted that rate cuts were not being discussed yet and rates may even need to go higher to bring inflation under control. ECB noted that tighter financing conditions were leading to demand contraction, which weighed on pushing down inflation. Economic growth is expected to remain subdued. ECB estimates gradual ramp up in growth from 0.6% for 2023 to 0.8% for 2024, and to 1.5% for both 2025 and 2026. BOJ DECISION IS MOST UNCERTAIN WITH A THORNY JOB ON HAND The Bank of Japan (BoJ) is set to announce their rate decision on December 19th. It has maintained ultra-low interest rates all year while others hiked aggressively. Recent statements by BoJ Governor Ueda signal a pivot away from the ultra-low policy. "Managing monetary policy will become even more challenging from the end of the year and heading into next year." ~ Kazuo Ueda, Governor, Bank of Japan on 6/Dec Governor Ueda’s statements have led to market expectation of upcoming monetary tightening in Japan. JPY has strengthened 6% relative to the USD over the last month. Despite Ueda’s statements, BoJ pivot remains uncertain. Inflation in Japan is running hot and above US inflation. Moreover, wage growth and economic growth in Japan have been moderate despite high inflation creating stagflation risks. Consumer spending and wage growth remain muted despite record profits. Feeble Yen is boosting Japanese exporter profits. Nevertheless, the BoJ has been setting up a change in monetary policy. Earlier this year, it raised the cap on JGB yields and eventually changed the cap from a rigid limit to a loose reference. Some economists consider this a prelude to eventual scrapping of the YCC altogether. CENTRAL BANK DECISIONS HAVE CREATED DEEP RIPPLES ACROSS MARKETS Commodity markets reacted positively to the rate announcements. The Fed’s signal of upcoming easing opened the door for commodity demand to rise. Precious metals are likely to benefit from asset rotation out of US treasuries while Crude will benefit from higher economic activity from lower interest rates. Equities surged on Fed pivot. Small-caps and Mid-caps outperformed the Nasdaq-100 and S&P 500. Both SPX and NDX also extended gains. Bond yields fell sharply following the FOMC decision. Yields fell to their lowest level in four months. One-year bond yields performed the best while thirty-year performed the worst. LEVERAGED FUNDS ARE BULLISH EURO, STERLING, AND BEARISH YEN Asset managers and leveraged funds are net long on Euro FX futures. Asset managers and leveraged funds are net short on Yen and Pound futures but have reduced net short positioning over the past few weeks. HYPOTHETICAL TRADE SETUP The Fed’s dovish stance plus the hawkishness of European central banks will result in dollar weakness relative to Euro and Sterling. Upside risks to the dollar persist with stronger economic data and inflation resurgence forcing the Fed to reassess its stance. To gain from the weakening of the dollar against the euro and sterling, investors can buy into CME Micro FX Euro and GBP futures. A long sterling provides higher upside than long euro given higher inflation in the UK. Policy uncertainty in Japan is unlikely to usher in a pivot in the short-term. The JPY is likely to weaken against the dollar despite DXY weakness. To harness gains from weakening Yen, investors can establish a long position in CME Micro JPY Futures. Hypothetical Trade 1 & 2: Long EUR and GBP Entry: 1.0960 Target: 1.1150 Stop Loss: 1.0860 Profit at Target: USD 238 (= 1.1500 - 1.0960 = 190 pips = 190 x 1.25) Loss at Stop: USD 125 (= 1.0860 – 1.0960 = -100 pips = -100 x 1.25) Reward-Risk: 1.9x Entry: 1.2720 Target: 1.3120 Stop Loss: 1.2490 Profit at Target: USD 250 (= 1.3120 - 1.2720 = 400 pips = 400 x 0.625) Loss at Stop: USD 144 (= 1.2490 – 1.2720 = -230 pips = 230 x 0.625) Reward-Risk: 1.75x Hypothetical Trade 2: Short JPY Entry: 139.57 Target: 146.28 Stop Loss: 137.97 Profit at Target: JPY 67,100 (= 146.28 - 139.57 = 671 pips = 671 x 100) Loss at Stop: JPY 16,000 (=137.97 – 139.57 = 160 pips = 160 x 100) Reward-Risk: 4.2x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:M6E1!
by mintdotfinance
Will EUR-USD Parity Repeat?Two men adventuring in the wild. They see a tiger racing towards them. They turn and start dashing away. Then, one of them stops to put on shoes. “What are you doing? The beast will outsprint you despite those” says the other. “I don’t have to run faster than the tiger” he retorts. “I just have to outrun you.” FX stories are not dissimilar. Relative strengths and weaknesses facilitate price discovery between currency pairs. On 1 January 2002, twelve EU countries move to euro in a historic event. Since December 2002, the euro has always traded above parity to the US dollar. The only exception is the last quarter of 2022. EUR/USD has been above parity since late 2002 except for Q4 2022 Despite the collapse of regional banks, US corporations and consumers are in the pink of health. Cracks are starting to show in certain pockets but none too alarming (just yet). In contrast, economic conditions in Europe are in sharp deterioration. Arguments abound on the direction of the euro ahead. Following the rate decisions by the ECB and the US Fed last week, volatility in the Euro/USD pair has been trending to near 12-month lows. Low volatility equates to lower premiums on options. Periods of low volatility are opportune time for buying options. This paper posits that euro will carry greater risk to the downside. That said, geopolitics and economics could turn favourably to the euro resulting in a rally. To seize opportunities presented by the price action, this paper posits a long straddle to benefit from low volatility & a euro that is set to move. EURO SKEPTICS OBSERVE MANY PROBLEMS Talk of the euro falling back to parity is once again creeping into the market murmurs. Google search on euro parity is at levels last seen in Nov 2022. As reported by Bloomberg, last month, Nomura, Rabobank & ING analysts forecast the euro to get to levels marginally shy of parity to the USD. The likelihood of the euro hitting parity by early next year have more than doubled, as per Bloomberg options model. Strong US economic fundamentals, rising US yields are bolstering the dollar. Rate differentials between the two tilts in dollar’s favour. US Q3 Real GDP was up by an annual rate of 4.9%, more than double the growth rate for Q2. Additional tailwinds for greenback include sluggish Eurozone economic growth, concerns linked to Italy’s government debt, and slowdown in destination markets for Eurozone's exports. OTHER ANALYSTS BELIEVE THAT EUROZONE PESSIMISM IS ALREADY PRICED IN Disagreeing with euro sceptics are analysts with a view that Eurozone pessimism has been baked in. Eurozone GDP fell by 0.1% in Q3. Despite feeble GDP data, market reaction was stoic. That points to an "invisible" floor for the euro. Lack of growth is priced in. FOUR CHARTS CONTRASTING US EXCEPTIONALISM WITH GROWING EUROPEAN WEAKNESS US GDP continues to expand at a remarkable clip given the size of the economy. In sharp contrast, Eurozone GDP growth is fragile and steadily losing steam. US GDP racing ahead with Eurozone GDP losing steam US inflation, while softening, is showing signs of spiralling up, thanks to its resilient and tight labour market. This puts the Fed on a hawkish stance supporting USD. Inflation still above central bank targets but US inflation raging higher than in Eurozone Meanwhile, the ECB might have headroom to ease rates thanks to slowing inflation and might be forced to loosen up to support growth and to stem economic contraction as shown below. Composite PMI in US in expansion territory compared to sharp contraction in Eurozone Monetary policy divergence between the Fed and the ECB has prevailed since early last year when the Fed was quicker relative to ECB to crank up rates. Interest Rate Policy Divergence in US has continued to remain in favour of the dollar In summary, the USD is poised to strengthen against the Euro, given strong GDP, higher US inflationary environment, sharp contraction in Eurozone, and continued monetary policy divergence. TECHNICALS ALIGN WITH FUNDAMENTALS POINTING TO WEAKENING EURO Momentum based indicators signal further weakness in the euro while oscillators point to strengthening based on near term mean reversion. Overall, across twenty-five indicators curated by TradingView, eleven signal weakening, ten neutral, and four point to strengthening. TradingView’s Technical Signals Dashboard point to euro weakness CFTCs Commitment of Traders (CoT) report show that leveraged funds are net short. Asset managers who are still net long are gradually reducing their long positions. In contrast to fundamentals, technical, and CoT reports, options market data points show that traders are bullish for euro to strengthen. Put-call ratio at 0.76 shows larger open interest on calls compared to puts. That said, over the last one trading week, options traders are increasing puts compared to calls suggesting shifting market sentiments leaning towards a weakening euro. Implied volatility based on options market is near 12-month lows with the conclusion of central bank meetings across both sides of the Atlantic. Low implied volatility makes premiums affordable. CVol Index is at near 12-month low (Source: CME QuikStrike) HYPOTHETICAL TRADE SET UP Affordable premiums offer the best opportunity for buying options. When ambivalence prevails on the path ahead for the euro, traders could consider a long straddle to leverage volatility expansion and price action. This paper posits a long straddle at a strike of 1.0845 on CME EUR/USD options expiring on 5th April 2024. A long straddle comprises of two legs: (a) long position in a call, and(b) long position in a put, at the same strike and expiry. Each CME EUR/USD Monthly options contract delivers an exposure to 125,000 euros. Take the settlement prices as of November 3rd as an example, premiums for the (a) long call at 0.0182, and (b) long put at 0.0187, aggregate to 0.0369 for the long straddle. This translates into USD 4,613 in straddle premiums. The straddle has two break-even points (BEP) at expiry. BEP on the downside is at 1.0476. BEP on the upside is at 1.1214. The pay-off from the straddle is illustrated in the chart and table below. Pay-off at Expiry from Long Straddle (Source: Mint Finance Analysis) MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME:6E1!
by mintdotfinance
EURUSD 6EF Short Trade Idea 6EZ2023 - EURUSD - SHORT 6E / EURUSD just had a strong bearish reaction on the H4 timeframe to the area of sensitivity (weekly fair value gap FVG). On a pullback into a H4 premium, I will be hunting short triggers on M15 timeframe to then target the PWL (previous weekly low). This correlates nicely with DXY, which just had the same reaction to a weekly FVG. There is a nice weekly fractal high within the weekly fair value gap on DXY which should act as the next DOL. 6EZ2023 doesn't have a fractal high to act as a draw, so I will be watching DXY to determine when to exit the short.
CME:6EZ2023Short
by Tradius_Trades
EUR/USD 10/10/2023 Levels My daily Bias for EUR/USD for the day will be Bullish Im expecting another green candle close. Optimal trade set ups for shorts will be found from premium to discount levels and for longs from discount to Premium levels. Where you will be able to harvest a few pips. Look for a fill of the GAP and Liquidity voids on break of market structure. Optimal trades can be found at 2am and 7:45 - 11:45 AM EST for higher probability as during this time the algo makes a move with heavy volume. Strong buy zones for long can be found at EQ for reversals to the upside. Safe Trading Transcend Reality FX:EURUSD
CME:6E1!
by Louisprez
Where is the Euro Headed?Despite unprecedented rate hikes up to 450 basis points over the last 12 months the Euro has lost ground to the US Dollar for the last nine straight weeks. As a result, the Eurozone interest rates are historical highs. Currencies desire nothing more than higher rates. The Euro should have popped but instead it flopped after the ECB’s rate hiking decision last Thursday. That says something about the underlying economy and the expectations for interest rates ahead. This note puts forth data backed arguments that macroeconomic fundamentals in Europe is visibly weak. In sharp contrast, the robust economic fundamentals in the US provide strong tailwinds to the US dollar. Consequently, the Fed has great monetary manoeuvring space which will impose bearish pressure on the Euro. Having cranked up rates to a peak unseen before, the ECB’s hands are tied with little room for further hikes despite its hawkish tone. This paper posits a short position in CME Micro EUR/USD Futures expiring in Dec 2023. To seize opportunity from a weakening Euro, a short position with an entry at 1.071 combined with a target at 1.035 and hedged by a stop at 1.1025 will deliver an expected reward-to-risk ratio of 1.14x. MONETARY POLICY TRANSMISSION TAKES TIME Over the last year, the ECB has increased interest rates, an unprecedented ten times to combat surging inflation. That is a full 450 basis points. Yet inflation remains sticky and persistent. Why? One obvious reason is monetary policy transmission. Monetary policy transmission is the process through which a Central Bank’s monetary decisions impact the economy and the price levels. The mechanism is characterised by long, variable, and indefinite time lags. As a result, it is difficult to predict the precise timing of monetary policy actions on economy and inflation. DATAPOINTS SIGNAL WEAKENING ECONOMY Selected data from the minutes of the Monetary Policy Meeting of ECB Governing Council held in July points to growing weakness in Europe. 1. Yield Curve Inversion Deepening: Together with negative euro area data, the inversion has reignited recession concerns. For now, the Euro area’s equity & credit markets remain resilient, hoping for a soft landing. 2. Sharp Contraction in Euro Area: Euro Area Composite PMI has been declining since April 2023 and in July it has fallen below 50. The dynamics are consistent with a weak GDP performance for the second and third quarters of the year. Housing and business investments are estimated to have declined. 3. Shrinking Demand for Loans: The latest bank lending survey signals further tightening of credit standards and sharp drop in loan demand in Q2 across businesses and households. The reported demand for loans among corporations had fallen to an all-time low since the start of the survey in 2003 and, for the first time, was lower than at the height of the global financial crisis. 4. Growth could stall due to over correction: Growth could slow far more sharply if effects of monetary policy were more forceful than expected, or if the world economy weakens dampening demand for euro area exports. AFTER UNPRECEDENTED RATE HIKES, WHAT’S NEXT? As evident from weakening signals cited above, the ECBs hands are tied. ECB President Lagarde has little option other than maintaining a hawkish tone to manage expectations. When the ECB regroups again in December, the likelihood of rate hike is thin. Hawkish pause? Maybe. As Katie Martin writes in her weekly opinion piece for the Financial Times, “few truly believe the central bank really would raise rates further, especially while the region’s economy feels the strain from the tighter policy enacted so far and from the impact of weaker Chinese demand on German manufacturing.” ECB’s euro area growth forecasts are on the decline. The central bank expects 0.7% growth for this year (down from 0.9% as previously estimated). For 2024, the ECB now forecasts 1% growth (compared to 1.5% growth projected previously). Forecasting the future is hard. It is evident from a survey of economists (see chart below) conducted by Bloomberg earlier this month. The market expectations are for rates to stay flat at 4% for now with rate reductions from Q2 next year. When these expectations become consensus, Euro weakening will accelerate. DOLLAR CONTINUED STRENGTH AGAINST THE EURO The Euro has shed more than 5% against the greenback since mid-July. Shaky fundamentals and an elevated risk of recession have raised questions on ECB’s ability to continue hiking. Contrast this against the conditions in the US. The US economy has been marvellously resilient and set to have one of its best years yet. This backdrop emboldens the US Fed to take on an aggressive monetary posture. TRADE SET UP Interest rates at record elevated levels combined with weakening economy and feeble prospects, collectively pushes recession risks higher in the eurozone. This will corner the ECB into a pause or even cause it to hint at rate cuts during the December meeting. As a result, the Euro will be pressured lower against the US dollar. To ride on the opportunities from a weakening Euro, this paper posits a hypothetical short position in CME Micro EUR/USD Futures expiring in Dec 2023 (M6EZ2023) with an entry at 1.071 combined with a target at 1.035 and hedged by a stop at 1.1025, delivering an expected reward-to-risk ratio of 1.14x. Each lot of CME Micro Euro Futures contract provides exposure to 12,500 Euros. It is quoted in USD per Euro increment. Each pip i.e., 0.0001 per Euro delivers a P&L of USD 1.25. • Entry: 1.071 • Target: 1.035 • Stop: 1.1025 • Profit at Target (hypothetical): USD 450 ( = 0.036; 360 pips; 360 x 1.25 = 450) • Loss at Stop (hypothetical): USD 393.75 ( = -0.0315; -315 pips; -315 x 1.25 = -393.75) • Reward-to-Risk (hypothetical): 1.14x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Editors' picks
CME_MINI:M6E1!Short
by mintdotfinance
8
$6E1! futures gap up, bullish for EURUSDVery brief follow up with the EURUSD short term bull case I was building last week, and finally put on a trade on Friday before close, both the Euro FX futures CME:6E1! gapped up, and the MOEX:DX1! futures gapped down. If this follows through, that bodes well for my AMEX:FXE calls. I will add, the options market in AMEX:FXE are not very liquid. You will find yourself buying on the ask and likely selling on the bid. I tried to get an inbetween the market fill and it just wasn't happening. But, if the move is big enough through the next couple weeks, hopefully the profit still turns out fairly tidy. Futures open on a Sunday are not exactly something you can count on for the general direction, sometimes not even for the next day, but hey, it looks good for my trade at the moment, I'll take it. We'll see what tomorrow holds and hopefully the next ~2 or so weeks.
CME:6E1!
by dieseldub