Euro Gains Leave Little To Be Excited About

Includes: ERO, EUO
by: Ron Finberg

Tuesday was a huge day for risk buying as US equities indexes gained around 3.0% while their European counterparts enjoyed a similar move higher and continue to gain on Wednesday. In Forex land, the Pound and Australian Dollar had great gains against the US Dollar. Following along for the ride, was the EURUSD which hit a high of 1.3132 on Tuesday, to rally 1.0% from its lows. Nonetheless, the Euro's gains left little to be excited about; here's why.

  • EURGBP - Traded to a low of 0.8340, an eleven month low
  • EURAUD - Currently below 1.2900, an all time low
  • EURCHF - Hit a low of 1.2155 yesterday and is down over 200 pips from last week's SNB rate meeting where the central bank decided to leave their EURCHF target at 1.2000, rather than raising it.
  • Gold denominated in Euros - At 1240 from 1225 yesterday morning
  • EU News - Pretty much every headline about Tuesday's rally and the subsequent gains today has mentioned positive news from the EU as the cause of risk buying. Specifically Tuesday's German Ifo report and demand for Spanish debt.

So there we have it, an overall global rally triggered by encouraging EU news, and the Euro underperforms every asset except for the Dollar and Yen. More surprising is that the Euro has been such a weak performer, and generally we will see the weakest assets receiving the largest gains during an overall bargain hunting or "dead cat bounce" move (see bank stocks which outperformed the market on Tuesday).

As such, this should be very alarming to Euro buyers since the current trading action indicates that the currency is vulnerable to overall depreciation in both risk selling and buying markets. This is revealing that money continues to rotate out of the Euro, the only question now is where it is moving to.

That being said, our favorite long term pick continues to be shorting the EURGBP. Unlike the EU which is seeing the ECB take as passive a role as possible during the debt crisis, the UK has received assistance from BoE easing after the implementation of its government budget cuts. These moves have raised the Pound in the eyes of Forex traders and triggered a steady flow of cash to migrate towards the UK.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.