Euro Remains Under Pressure: How Do We Trade It?

 |  Includes: FXE
by: Ralph Shell

For those with an involvement in the value of the euro, this has been a week of heightened angst. The prevailing fear and negativity, a reminder that during a crisis, generally, what can go wrong usually does, seems to be holding the market hostage.

On Monday, the EUR/USD continued to trade lower, following last week's sell off. Fear the Greek government would not find sufficient private investors willing to restructure existing loans was given as a reason for market weakness. Some observers even bandied about the possibility of €1T in European bank losses should Greece miss the deadline for the debt restructuring. These stories proved unnerving to equity markets, and were cited as a reason for their retreat.

From the beginning of the Greek crisis, the euro has seemed to trade well, prior to the next summit, anticipating the political class would produce a solution to the current financial trials. Then, when no comprehensive solution is presented, the market sells off.

The ECB, with its LTRO program, availing 800 banks to €529.B of 1% money for three years, is the latest attempt to stabilize the European financial ship. To qualify for the loans, banks had to submit collateral to the ECB. Some of the loans tendered to the ECB has been of dubious value, as the banks tried to dump bad loans.

It was reported in zerohedge today:

"European Banks Now Face Huge Margin Calls as ECB Collateral Crumbles ... The ECB has started to make very sizable margin calls on its credit-extension counter-parties. While the hope was for any and every piece of lowly collateral to be lodged with the ECB in return for freshly printed money to spend on local government debt, perhaps the expectation of a truly virtuous circle of liquidity lifting all boats forever is crashing on the shores of reality."

With the two recent massive ECB loans of about €1T this brings the balance sheet of the ECB to above €3T. At this level, according to zerohedge, the ECB is leveraged at 37 to 1. With European economies slipping into recession and the ECB well extended, this may prove a problem for the single currency.

Should the Greeks muddle through and get their bond write down finalized the market might start to respond to other data. German factory orders came in down 2.7%, perhaps an indication Germany will not be immune from the slumping economies surrounding them.

The important data this week are the labor and employment data coming from the U.S. Today the ADP non-farm employment change cme in at 216K, better than the estimate. On Friday we get the U.S. non-farm employment change and the unemployment rate. These numbers are important, but highly unpredictable.

Should the EUR/USD stage a rally, perhaps because of the data, or because of other news, we wish to try the short side of this pair. The 1.32 to 1.3240 area looks like an interesting entry point. The downside looks to be a test of the 1.2975 area. As always, mind your money management.

Click to enlarge

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