Euro Rally Stalls - Is It Over?

 |  Includes: FXE, UDN, UUP
by: Ralph Shell

After the euro bulls had their way for five days versus the USD, (FXE, UUP) the sixth day, which took the market above the 1.3125 area, has seemingly given us a reversal. There was some negative news that may have been unnerving for the euro.

Spain held an auction today for mostly 10-year bonds. The rate was down to 5.29, better than 5.52% on the last auction, however, Spain did not sell all €5.4B bonds. Bids fell short of covering the entire supply. Shortly thereafter, EU retail sales were reported down 1.2% for the month, and down 3.6% on a Y/Y basis -- much worse than expected.

Even without the negative news, the euro had rallied close to an area that had provided resistance in mid-September and October. Resistance in this area should be expected.

There were also some meaningful U.S. statistics revealed today. The ADP Employment Change was 118K new non-farm jobs, down from the expected number, and down almost 40K from the previous month. This is slightly negative, but lower labor costs and higher productivity reports may offset the poor number. There was also a U.S. PMI-ISM Non-Manufacturing Composite Index that came in at 54.7 -- better than last month and expected.

The reports continue tomorrow on both sides of the Atlantic. The quarterly and Y/Y European GDP is expected to come in at -0.1%, and -0.6%, respectively, in the morning. This will be followed by an EU rate statement and a press conference with ECB President Draghi. Surprises are not expected, but you never know.

Later on Thursday, we get the initial U.S. jobless claims. It is estimated the number will be 380K, but a number 400K or higher would cause some hand wringing, and perhaps confirm the U.S. recession whispers. On Friday, we get the grand finale of the week, the NFP -- a smallish 87K estimate and an unemployment rate of 7.9%.

We also get the results of the Greek bond buyback. Remember, these are the replacement bonds issued to the private owners who "voluntarily" agreed to take a haircut on the original issue. If Greece is unable to buy a sufficient quantity at the current market price, IMF Director Lagarde says she will not issue their portion of the next tranche of bailout funds.

Looming in the background is the U.S. "fiscal cliff." It is my opinion, judging from the other side of the Atlantic, President Obama wants to proudly march over the cliff, unless he gets higher taxes to partially pay for an ever-expanding federal government. Republicans want neither higher taxes, nor a bigger government. March over the cliff, and should any economic reversal occur in the next four years, President Obama will have a new group to blame.

This is USD bearish, unless global economies, as well as the U.S., turn lower in December. Perhaps in this case, the USD would again re-emerge as a safe haven. Then again, haven buyers can be fickle. Are they buying stock in Mexico today, where the Bolsa IPC Index is printing a new high?

The trend in the euro has turned higher, but there are a number of news events that may break either way. Remember also that Friday is the expiration of the CME December options. Option sellers like for the futures to close on a strike price so they can collect all the premium. Currently, the largest open interest is in the 129 strike, 7,832 contracts, the 130,6998 contracts, and the 131 strike, 6366 contracts.

Trading opportunities do exist for the brave and nimble, however, I am inclined to sit this one out.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.