By Dean Popplewell
The euro framework continues to cause jitters and the dollar is starting the week where it happily left off on Friday, in demand. For a multi nation currency, euro policy makers seem intent to follow the path of least resistance and talk their currency out of danger. This reactionary approach is beginning to have holes in its argument, as the single unit again eyes its recent multi-year lows despite the currency’s performance in an aggressively oversold market. The greenback has appreciated overnight against the majors minus the yen, extending Friday’s performance, while global equities falter at the start of the week. Yen outright has rallied to a six-week high, following comments from the BoJ governor that monetary easing alone cannot change sentiment. The rise in market pricing for new QE by the Fed has contributed to a global dash for carry. Combined with weaker than expected growth and inflation is contributing to a surprise shift to dovish monetary policy execution. With the technicals not wholly convincing, value for money is guiding most of the new position taking for now.
It seems that the current crop of currency investors are becoming more apathetic to the current euro situation. Reports this morning that German Vice Chancellor Roesler is “very skeptical” that euro leaders will be able to rescue Greece and that the prospect of the country’s exit from the euro had “lost its terror” is not providing the EUR selling urgency interest it may have a few months ago. Even reports that the IMF will stop disbursing further financial assistance to Greece, making the country’s insolvency in September more likely, appears to be having more of a weary affect on price movement first thing this morning. Are EUR short positions that stretched? Is it time to begin a healthy recycle?
The currency price effect is in contrast to the periphery bond market and its yields which officially continue to dominate capital market headlines. Spanish debt yields have again surged to new fresh euro era highs as worries about the regions debt crisis gathers momentum. The Spanish governments 10-year product has backed up +23bps to +7.45% this morning, while Spanish equities have been the worst euro hit bourses on fears that the country now requires a sovereign bailout. Last Friday it was just Valencia looking for that Spanish handout, since then, six more regions are reported to be seeking Spanish funds. Markets are now beginning to look at Spain, Europe’s third largest economy, at becoming the next program country to tap the EU rescue mechanism instead of the primary debt markets as funding costs increase. Capital markets seems to be going for the slow Spanish kill?
Euro region, euro data and EUR currency aside, this week’s packed U.S. data calendar is likely to further highlight the uneven tone of U.S. economic activity. Tomorrow, markets are expecting a small decline in the flash PMI for this month and a small improvement in the Richmond Fed manufacturing index, while the Kansas City Fed is the other regional survey who’s consensus is set for a flat reading. Durable goods orders, close to the end of the week, are likely to disappoint with a majority expecting a -1.0%, m/m, print on both headline and core capex. Even Q2 growth data is anticipated to miss, falling to +1.6%, q/q, down from +1.9% in Q1, and mostly driven by weak consumer spending. Perhaps the one bright spot is stuck in midweek, new home sales on Wednesday expected to uptick to +375k. It’s Monday and it’s difficult to get too excited in one directional flow at this moment.
The macro EUR positions love it as we move further and further away from their knock out 1.24 handle of last week. The intraday techies ending last week we beginning to lean towards an intraday EUR rally with a tight stop. This story would have had a happy ending apart from Valencia seeking fresh funds and Spanish yields rallying. The same scenario holds true this morning. It seems more Spanish regions are going cap in hand and Iberian funding costs are firmly entering unsustainable waters. The currency techies believe that a sharp drop through the long term 50% fibo opens it all up for the single unit to test its seven year low at 1.1985. However, rallies are oversold; record shorts need a recycle. Expect the market to use upticks as an opportunity to add new short bets. OANDA’s EUR positions are currently very long the single currency and not with a good average since they have been buying on this and last weeks retreat!