NEWS / Foreign Exchange

Is the USD sell-off overdone?

Our Index of Weekly Economic Indicators is staying at a very strong level. Actually, on a quarterly basis, the current level is the highest since 2000, which was itself a record year. Thereby, we are seeing a very interesting discrepancy between the IWEI and expectations for the Q1-2007 GDP growth emerging at the same time as the USD is continuing its heavy sell-off. EURUSD is about to reach the previous high of 1.3666.

As we are stating in our FX Order Book (see below), we recommend to buy EURUSD, if it breaks the old high of 1.3666, but we will also recommend to buy a put option (strategy to follow) in that case, since we believe that the US GDP figures released next week could surprise to the upside. All the big institutions expect a rather low reading (lower than average among analysts), so the whisper figure out in the market might be as low as 1.7% or even 1.6%.

Our IWEI has been extremely good at reproducing relative highs and lows of the US GDP growth since 2000, but it is not as good at reproducing the actual level of growth. That being said, the current discrepancy between the IWEI and GDP forecasts is very surprising and could point to a massive expectations failure, which could lead to a sea change in USD flows. We are not saying that it will happen, but it is just extremely rare that we see the IWEI and expectations disagreeing this much. That??™s why we did an options play, with EURUSD close to the previous high.