By Dean Popplewell
The latest dead cat bounce will leave the seventeen member currency under renewed threat. Already this morning the single currency had been riding another deflated crest once Moody’s decided to cut Germany’s rating outlook to negative from stable. The latest hatchet job now leaves Finland as the only AAA-rated eurozone member with a stable outlook. The EUR briefly attempted higher levels after a surprisingly good Chinese flash PMI reading over night. However, the moves remain cautious. Investors are continually distracted by the euro drama and skyrocketing periphery yields in Spain and Italy convincing a fraction of investors of an impending EUR break up. At the very least, Spain will require a sovereign bailout allowing the market to focus its attention again on Italy. Investors are weary and well beaten as policy makers have failed miserably to stop the euro contagion threat. The market want to see action and no more words.
Many have been touting the EUR as the latest funding currency. However, there seems to be very little evidence that investors are using the single currency in a funding capacity. For any currency to act the role of a funding vehicle requires longevity. This is where a market believes that the underling asset is here for the long haul. Currently that cannot be said with confidence about the EUR. If you follow the money, few investors seem to be exploiting the view of very low ECB yields. A resurgence of eurozone risk, insufficient attempts by China to stimulate growth, and a U.S. economy starting to turn downwards it is not surprising to see investors shy away from risk and park their assets into the “safety of the safest of safe haven bonds.”
Is it a surprise that this morning’s euro data is earmarking the whole of the 17-nation economy for a recession? Eurozone companies have managed to reduce output for the sixth consecutive month in July. This is even occurring in the biggest of economies, Germany and France and making it even more difficult for policy makers to get a firm grip on the overall regional situation. The composite PMI was unchanged at 46.4, a print solidifying contraction and another economic excuse to signal a euro recession based on the definition of two straight quarters of falling output.
Breaking the negative euro rhetoric monotony is this morning’s daily press copy of the Spanish government contemplating of putting on the table a possible Spanish withdrawal from the euro. Similar to any other fleeing member, they would have their own currency again and potentially restore competitiveness. Patriotism and nationalism sound so grand in theory, but what would the reality be like? Short term, it will feel bad for the general public, but, would it be much worse than the present conditions? Spain is one of the founding members of the euro and believes going alone in theory they would emerge from the crisis sooner as they regain control over their own policies. What ever happened to all for one and one for all? Spain is accountable for its own actions and their solution is to possibly run scared first time out does not bode well for continued regional unity.
The Spanish bill auction was unremarkable, but consistent, as the government again sold at higher yields. The transition from Europe to North America is painting a familiar story, the EUR is dead in the water above 1.21. The weight of the euro bad news has been tempered by the pull of large speculative outright short positions. Perhaps EUR traders should be looking at the crosses for direction vindication. The intraday charts seem to be convincing the techies that there is more scope for further weakness with many looking to reestablish new shorts on upticks, targeting the seven year trend-line of 1.1985. OANDA’s fresh longs have been riding the latest positions down the last big figure. Prudently, and despite trading just above recent lows, they have managed to pare some of these losing positions, preferring again to wait on the sidelines.