By Dean Popplewell
The bears and the quick money speculators thought they got it wrong. The EUR was not supposed to remain bid during yesterday’s North American session. Agreed, filling in “the” gap was a technical necessity, but once achieved, for the bear the positioning felt wrong. Perception is a powerful tool. Many traded believing that the single unit was being supported, in theory, by the potential available liquidity of the ECB and the EFSF/ESM programs. Their liquidity “provides a powerful bulwark against full-blown systemic conditions.” Others were beginning to buy into the idea that the changing of the euro-guard is good for Europe. President Hollande may be able to swing the balance from total austerity to a mixed bag of tricks, to at least create the illusion of progress. Now that the EUR has been unable to hold the line, the focus swings back in the bears favor with Greece again taking most of the EUR negative heat this Tuesday.
In truth, a lower EUR may be in focus, but several months of semi-volatile consolidation within a three cent range of 1.3-1.33, has many investors hesitant to throw the kitchen sink at the EUR. One gets the feeling that market participants would prefer fading a squeeze, however, with everyone feeling that way perhaps yesterday’s gap filling may have been “our bounce.”
(click to enlarge)
(Click to enlarge)
With so much negative focus on Greece, sustainable EUR strength may prove elusive. The inconclusive Greek parliamentary results leads to further uncertainty and potential new elections. Even if a second vote were to create a more stable coalition, financial timing is not on the Greeks side. Timing it seems would suggest that any new government would struggle to agree on and secure parliamentary approval for +EUR11.5b in further cutbacks by the end of June as required for the next troika payment. The fear that Greece becomes the first developed nation to default on its debt is becoming more real and hence why the Euro Capital Markets trade so.
The Greek and French electorate are clearly unhappy with the austerity policies favored by European leaders. The Greek stalemate is keeping investors cautious and fueling demand for the safe haven German Bund while off loading periphery product. For the moment, Spanish and Italian bonds yields trade under that psychological +6 to 7% sustainable barrier. Technically, Greek problems have come back to haunt Capital Markets. In reality, they have never gone away. Euro leaders just chose to believe and convey that thought. Expect the Bund to trade close or on top of its record low for some time.
Technically, there are some quasi-official bids slowing down the EUR’s decent, however, market expects a retest of the low 1.29’s. Currently, similar to the Euro election trading pattern, there are small stops below 1.3 with option barriers at 1.2950 remaining the key support for now. Intraday, investors can expect further 1.30 expires, however, selling the single unit on upticks remains the investors trade of choice because of the European political impasse.
The current European situation is beginning to open doors for Yen to outperform over the coming months. The issues surrounding the implementation of Greece’s austerity program, required by international creditors, raises the possibility of a disorderly default by a developed country. The country running out of cash by the end of next month could lead to a chaotic financial market summer. All of this will only benefit the yen, especially with the SNB preoccupied.