By Dean Popplewell
Yesterday, French President Hollande was lobbying on behalf of Greece and other weaker European economies, reiterating his support for a mutualization of the eurozone debt and in danger of alienating his supposed largest ally. A day later and we have a renewed show of unity from Germany and France to fix the euro crisis. It’s very much a turnaround in relations after Hollande led a revolt at last June’s summit against Merkel’s austerity-first doctrine for combating the financial crisis. This renewed show of force has taken the EUR bears by surprise this morning and is providing the single currency with continued support.
After yesterday’s session of pre-boredom the market was expecting more of the same this morning, however, this has not been the case with players adjusting positions ahead of Jackson Hole whilst month end flows have also started to kick in, muddying the waters. The initial month end demand gave the dollar an outright bid and had EUR/JPY under pressure in the overnight session, but, these pull backs have been rather shallow once the tight stops were triggered outright. Currency traders are paring back their bearish EUR attitudes on expectations for policy action from the Fed and ECB. According to CFTC data last week, the net EUR short positions decreased by-9% to +$19.3b. While the euro data certainly has not been impressive, it seems that speculators are reluctant to bet on a declining EUR on economic grounds.
Also a surprise to the bears this morning was the results of the Spanish bill auction. Spain conducted 3 and 6-month bill sales earlier at significantly lower yields than the previous auctions. The yield on the 3-month has come down to +0.946% compared to +2.434% previously while the yield on the 6-month is +2.026% compared to +3.691%. The bid-to-cover ratio was also firm with 3-month at 3.4 (2.9) and 6-month 2.2 (3.0). The allocation of +EUR3.6b was slightly above the +EUR2.5-3.5b intended target indicating a stronger auction influenced by an ECB intervention promise continues to have a positive affect.
Despite the overall backdrop to the global economy remaining mostly weak, the extremes of speculative positioning may come under more pressure as we approach month end, Jackson Hole and key events next week. Looking at the Aussie, bullish positions had doubled since the start of the month until the end of last week. Since then, EUR/AUD is up +2% as these positions continue to look at risk to a China slowdown or any risk off spin from a top in equity markets. Certainly not providing its support is the Japanese government downgrading its assessment of the world’s third-biggest economy for the first time in 10-months as some analysts forecast that their GDP will shrink in Q3 considering weaker IP and exports.
Heading into the North American session, the EUR is leaving behind a surprisingly bullish session. Even with Draghi or anyone from the executive committee not attending Jackson Hole, this has not seemed to have raised any conspiracy theories just yet. The EUR bullishness has come from a well received Italian and Spanish bill auction, DJ Fitch Riley headlines indicating that the U.S.’ AAA rating is at risk of a downgrade by the first half of next year and tight EUR stops been triggered top side even with good amounts of EUR’s to go. To date, the overall market scope was for further EUR losses towards the 30-DMA (1.2336) in the coming sessions so long as the market continued its decline from last weeks high of 1.2590. The retail sector who have built up the largest net short EUR in some time are in danger of being taken out of these positions as EUR upside momentum persists as trading crosses to Stateside. Expect more EUR stop losses to become attractive to dealers just north of last week’s high.