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By Dean Popplewell

Just when you thought it was safe to enter the water the EUR takes flight. This morning's move has “rocked a few boats,” mostly because very few individuals had been expecting the 75-cent EUR leak. In the post move, the market has seen Mideast sovereigns and Japanese Real money happily buying from the lows. The natural reaction of this morning session, traders who are returning from their long weekend, would be to fade the rally on the back of negative short term technicals. The problem is that many will now be entering new positions at the center of “recent” extremes. With history repeating itself, it will indicate that this positioning, too, can also be a recipe for disaster. It may be preferable for NY to seek stops on the top side rather than jump two feet first.

Many have been at a loss to explain this morning's EUR outright move as a fundamental driver. However, reserve managers selling EUR/JPY, outright stops being triggered below 1.2965 and profit taking in EUR/GBP has helped to easily move this skittish market this morning. With traders unfazed by the rally in Chinese equities, the growth downgrades from the IMF and World Bank have dampened global risk appetite for the moment, and naturally increased investors' fears. The negative growth knock on effect is naturally hurting commodities and oil, and by default, growth dependent currencies. There were rumors that European Central Bank diversification happened to grease the EUR wheels, aiding in the currency sell-off. Obviously the lack of a strong commitment amongst short term traders has led many of them to stand aside. Even China has not been big enough to dissuade their actions.

The limited follow through to China’s large liquidity operations has managed to weigh on sentiment. Expectations that China will introduce further stimulus measures have been trumped by concerns of global growth. There had been hopes that further economic stimulus would come after the PBoC made its second largest ever daily injection into the money market. They have introduced the equivalent of +$42b to try to ease monetary conditions and strengthen their slowing economy. So far investors and traders have not bought into it. Continuing uncertainty about Spain and global growth prospect concerns are holding the biggest hammer at the moment. The IMF said that the risks of a serious global slowdown are extremely “high.” Providing no comfort was the Eurogroup meeting yesterday as it failed to bring forth any meaningful developments. The ESM came into operation, but uncertainty remains over when or even if Spain will ask for a bailout, particularly after Germany insisted that they did not require assistance.

In perhaps its bleakest assessment in three years, the IMF believes that risk of a serious slowdown is “high.” They have cut their global growth forecasts as the euro regions' debt crisis intensifies and warned of even slower expansion unless global policymakers address specific threats to their own economies. The world economy will grow +3.3% this year (slowest since the 2009 recession), and +3.6% next year, compared with July predictions of +3.5% and +3.9% respectively. The think tank and lender now believes that there is a “one in six chance of growth slipping below +2%.”

Oct 9

With little data released during North America to influence, everyone will be waiting for tidbits from today’s Euro Ecofin meeting and watching Merkel try to broker a Greek troika deal in Athens. The retail sector continues to sit comfortable short the EUR. They have held these positions for a number of weeks, even during the rapid appreciation of the single currency phase. Most have not been jobbing these positions because many initiated these shorts at such low levels on the first EUR run up that they are only beginning to come back into the money.

The technicals indicate that the “longs” are in play from 1.2967 targeting 1.3150, with a s/l below 1.2850. They would not have admired last night's price action and are sure to be sitting uncomfortably. The ECB president’s promise of unlimited OMT is trying to lift the single unit out of the danger zone. If it is unable to with conviction, expect the techies to begin offloading some of their longs on rallies.

Forex heatmap

Source: EUR On The Back Foot Again?