At long last the EURUSD took out the support at the 1.30 area, and worked down to a low of 1.2905. Currently the pair is trading at 1.2933 with hours until forex markets close for the weekend in New York. The bullish euro traders have been wounded by the market but it has not totally collapsed. For the bears, it seems like they have won a skirmish but it is far short of capitulation, by the bulls.
In the futures markets, most of the shorts have been the large specs, often hedge funds who are better financed, and are often prepared to carry a position for long periods when the trend is working for them. As the market worked lower during the week, the open interest in the futures markets climbed. The total open interest in futures was up to 342K from 312K when the week began.
The big events propelling markets this week were last week's elections, and the Spanish bank crises. The aftermath of the elections will continue. The inability of the Greeks to reach agreement on a new government remain a major problem, as will the horror stories about the Spanish Banks. Both are negative drivers for the euro.
Will the upcoming meeting with Hollande and Merkel be cordial or confrontational? Best not to get too excited if they go well. Even if the Germans concede the addition of growth would be beneficial to a European recovery, it may be too late. There were reports that the economic recovery is slowing in both China and India, joining a European slowdown. In the US, it appears JPMorgan Chase (JPM) has a rogue banker that has cost them $2B.
How the JPMorgan story unfolds, and how the weekend political developments evolve, will give us Monday direction. On Tuesday it will be back to fundamentals, beginning with the German quarterly GDP numbers followed by ZEW surveys in Germany in Europe. In the US, we get on Tuesday the CPI and retail sale numbers. There is no reason to think the trading pace will falter.
If you look at the price action in the EURUSD this week, it is important to note there has been a gap breakout to the down side. Significantly the chart gap remains unfilled which, combined with the soaring open interest, is bearish.
Yesterday we observed the USD broke to the upside versus the Swiss franc. This is to be expected as the SNB keeps buying the euro and selling the SF to maintain the peg to the euro at 1.20. We wonder, however, how many euros will the Swiss National Bank have to buy until they determine they have enough euro exposure? Certainly a Greek default, or failure of a few Spanish banks, will weigh more heavily on the euro rather than the franc. We are trying to figure out some trades for that possibility. (Click charts to enlarge.)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.