What has changed now to cause the euro to rally?
Absolutely nothing, post finished.
I suppose I should clarify that further shouldn't I?
Whenever we get a sudden big move or a surprise we always want to know the reason. For me it's easier (at first) to try and not get bogged down in the minute details. Take Drgahi's speech. It only had a minor effect today. If anything the euro rose because every time he speaks the market expects a very dovish remark. I didn't see any additional dovish comments, and in fact, it could be construed as being hawkish when he said that inflation is bogged down by global forces. That comment shows recognition that the ECB can't fight all inflation with policy. But there I go getting into those minute details. The euro hasn't risen 90 pips on that. It is rising because it's a continuation of what happened yesterday.
When markets were having their Jan blowout, China was one of the main reasons cited. I happened to think that there was also a fair bit of adjustment after the Fed hike. That really confirmed the end of the free punch bowl and many players changed tactics and positions to reflect one of the major central banks entering a tightening phase. That's a pretty big deal at anytime and a fact I think many ignored. When USDJPY traded down to 116.00 in Jan EURUSD was doing nothing around at around 1.0850-1.0950.
This time it's different. This time it's all about the dollar and it's become all about the Fed. Yesterday the services and ISM data was rubbish. Manufacturing on Monday was rubbish. Last Thursday's durable goods was rubbish. The thing is, we've all been noting it's been rubbish for a while but most of the market has been ignoring it as they chased the Fed hike, even though it was data dependant. How crazy is that?
It's been my long held belief that the Fed needed to hike to get rates off the floor because it was becoming too dangerous for them to stay so low. They did that and did it on two of things that are in their mandate, jobs and prices. They've got a strong jobs market and Core CPI at 2.1%. 2 out of 3 of the mandate that will lead to 3 out of 3 when they get "moderate long term interest rates". Number 3 is where the problem is now.
So here we are. The market is actually trading normally, where good data means hikes and bad data means cuts. The euro isn't up because Europe is doing well or monetary policy is changing, same for the pound and aussie etc etc. Right now this is 95% about the US and therefore USD. Right now bad data can't be ignored.
Forget correlations
I've never really looked out for correlations in trading. It's a mental thing that some people need because they think that if they find one, it helps them know where a market is going to go. It's crap because you've got to know where one part is going before knowing where the other part is going to go. If you knew where part one was going to go you'd trade it and forget about part two. All it does it give us two instruments to guess where they might go.
I understand the standard everyday correlations like oil vs CAD. Those correlations don't change. Their strength may ebb and flow but the relationship is constant, particularly in big moves in the underlying market (oil in this example). Things like the euro being a funding currency and correlating to stocks I ignore as they're not constant and are just too flaky to trust. So forget the temporary correlations and just trade what's in front of you. Have your bias via the tech or fundamentals, whether it's Draghi, dovish or hawkish, the US economy, good or bad and trade your instruments without the noise. It doesn't matter what the news is, either a level will break or hold, and that's all we really need to focus on and all we need to trade.
For the euro, it can go anywhere it likes. It's been ranging for ages and now it's broken out. We can't predict the news and we can't predict the next direction. All we can do set our sails to the news and data winds and watch the charts to see where the clear or rocky waters are.
