By Dean Popplewell
It's another day of “ditto” with a different EUR handle. With so many different holidays being respected it’s a wonder we have a market pulse whatsoever. Yesterday's only excitement came when the electronic executioners were called into action when a think tank suggested that a Spanish bond buy strategy was imminent. This did take most of the fun out of guessing why the EUR was so bid. You could have thrown in the usual culprits, the liquidity issue, some mixed U.S. data, some investors unwinding risk positions who had happened to use the EUR as their lending currency of choice or even Merkel’s public backing of the ECB and insisting that Germany is “in line” with the ECB’s approach to defending the single unit. It’s Friday and many will be thankful just to get home unscathed today.
Big picture, markets remain unconvinced that Europe “will act to support sovereign markets in Italy and Spain but are wary that plans for ECB and EFSF bond buying could still be progressing in the background.” So, it looks like both dealers and investors are in "check" position for now. Investors have to listen to more rhetoric, it is the only weapon at policymakers' disposal for now. The question that probably should be asked is what’s needed to get policymakers to act or react? In the background they know what is required, however, they seem to be legally handcuffed. With global data ticking over, perhaps we require another decent equity purge to entice CBankers to pull that monetary easing trigger? One positive development has been the confirmation that the German constitutional court will provide its ruling on the ESM on September 12 as previously planned, irrespective of the new call for delay that was brought earlier this week.
Beating expectations of a fall, the eurozone's current account surplus continued to rise in June due to an expanding trade surplus. The current account surplus rose to +EUR12.7b from +EUR10.3b in May. The May reading was revised slightly downward from +EUR10.9b. The market had been expecting a decline of -EUR6b. A surge in June exports boosted the region's surplus on trade (+EUR14.9b largest since 1999) to its highest print since records began, up +12% y/y, far outpacing the +2% rise in imports. The weak growth print in imports certainly highlights “the sluggish demand in the region's economy.” The strength in the export number could be a reflection of the weakness of the EUR itself.
The Northern euro versus the South rhetoric has been heating up of late. It certainly has been keeping many traders amused during this period of less “intellectual” banter with absent colleagues. The Austrian foreign minister said that the euro countries that fail to keep financial promises should be thrown out. Finland is more straightforward and suggests that the possibility of a euro break up has to be faced and goes on to suggest that it may not be the end of the European Union. It just may make the EU function a tad better. Expect this type of rhetoric to be stepped up over the coming weeks, the battle to “cow the peripheries into submission has begun in earnest.”
The overall market remains relatively short in anticipation of deeper losses in the coming sessions. The retail sector above, which decided to go small long near yesterday’s session lows, is relatively flat heading into the weekend. More neutral selling interest appears at 1.24, a key resistance level and tough nut to crack, through to 1.2450. Medium term bias continues to look to the downside as these lofty heights remain uninspiring. However, there is much talk in the marketplace of German demand to own EURs. This morning there has been good stateside interest to want to own the single currency from 1.235. Do not be surprised to see the S/Ls squeezed near 1.2440.