Tuesday December 6, 2016 - 15:34:22 GMT
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True Reason Why the EURUSD Rose Sharply After the italian Referendum
I get a kick out of reporters trying to explain what may seem unexplainable after the fact, such as the price action in the EURUSD following the Italian referendum result that showed a resounding NO vote against constitutional reforms. Some of those calling for a Euro zone crisis on a No vote were now trying to explain the reaction that saw a massive short-covering rally.
However there is more than just a short squeeze to explain why the EURUSD, which fell to a low at 1,.0504 early on Monday, reversed gears to surge to a high a 1.0797 high before settling down. This was a 293 point daily range from low to high, which is huge for this currency pair. EUR not only gained sharply vs. the dollar but on its crosses as well.
So what was really behind the EURUSD surge higher? I indicated on the Global-View.com Forex Forum before the fact that central banks were likely to intervene if the EURUSD fell sharply on the news. ECB president Draghi had already indicated the central bank stood ready to buy Italian bonds if rates spiked higher on a No vote.
While covert intervention may have been a factor as the EURUSD 1.05 level was clearly defended, there may be another reason for the massive short EUR squeeze. A risk premium associated with the Italian referendum was built into the EUR via short positions for weeks prior to the vote, both vs. the dollar and on its key crosses (e.g. EURGBP and EURCHF). When the fallout in the EURUSD was contained (e.g. 1.05 holding), “de-risking” took over as the risk premium built into EUR short positions got unwound. In my opinion the removal of the risk premium was the key factor behind the move higher in the EURUSD.
So now that the risk premium has been largely removed, EURUSD has to find its normalized levels both vs. the dollar and on its crosses. This may well be 1.05-1.08 or 1.05-1.10 if the market can find the power to squeeze shorts further. In any case, the move up is not based on a new found enthusiasm for the EUR but rather a normalization of levels after de-risking took place.
Where do you expect EURUSD to end 2016 and will it trade to parity in 2017?
Jay Meisler, co-founder
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