What Is FX Saying About Ireland?

Includes: ERO, EU, FXE, IEV
by: Rubicon Associates

We are all currency traders now.

As we get ready for the open across the world, Europe weighs heavy on everyone's mind. Is the Irish bailout enough? Is Portugal next, if so how far behind is Spain?

Is the Irish bailout enough?

click to enlarge

The euro touched, and went through, Friday's low briefly. While it is currently up, the answer to our above question, as expressed through FX, is no.

Is Portugal (and Spain) next? Right now, barring some unforeseen intervention, it looks like the vigilantes will move to Portugal. While Portugal has high deficits and might fundamentally deserve a good whacking (name one country that doesn't - if you could whack the US, wouldn't you?), fundamentals are not at the forefront here. The bigger picture is the inherently flawed nature of the union and their ability to remain intact and effect the changes and - importantly - optics that are required.

Sights will turn on Portugal. Treasuries are the flight to quality. Don't fight the trend; it will buck, but don't fight it. The bigger concern is that there is a continued flight from risk. I am going to stay flat risk and look for opportunities in the events that will follow.

Equities should be under pressure and credit should feel it too - look for a bit of backing up in some new issues and the IG/XO/HY generally. Breadth has been somewhat negative in credit markets recently, so there is little support here.

Let's be careful out there.

Disclosure: Author holds positions in periphery banks