EUR's Trading Void Is Deep

 |  Includes: AUNZ, FXA, FXB, FXC, FXE, FXF, FXY, UDN, UUP
by: Dean Popplewell

By Dean Popplewell

What is this market waiting for now? The U.S. debates, CPI and/or U.S. November employment numbers? Whatever it is, this market is lacking true conviction. Price movements are being easily influenced by headlines and not technicals. Big picture direction is 50:50 so it seems, and a flatline price movement with a spike seem to prove that. So far the single unit has managed to claw back from its early bashing in the Far East, a follow-on from the previous session. That said, underlying sentiment seems to be risk adverse, as markets continue to eye the Spanish and Greek budget and bailout situation. As outlined previously, global equities loss and growth outlook should manage to keep the EUR and risk on the back foot for the time being.

With little to scratch on the surface, investors will want to keep an eye on further headline news from the Fed-ECB joint conference on bank funding in Frankfurt; Holland and Rajoy meeting in Paris and EU’s discussion of banking union proposal. Stateside, investors will be preoccupied with this afternoons beige book and earnings reports. Already this morning the Fitch Rating agency has tried to provide the “grease for that squeaky wheel,” warning that eurozone members could suffer more credit rating downgrades. Similar to most naysayers, they provided a list of obvious reasons that are a concern to global growth. They indicated that there were major risks to the global economy including U.S. tax increases and spending cuts, the obvious eurozone debt crisis and a slowdown in China’s growth. However, the agency was unable to provide that eureka idea that was to have a concrete impression on Capital Markets.

The IMF has managed to be front and center this week and this morning is no different. In its latest Global Stability Financial Report it warns the eurozone policymakers the repercussions of failing to deal with the crisis promptly. This time they have focused on some eye popping deleveraging numbers. They propose that the deleveraging cost should amount to +$2.8t, a +$200b increase from their previous estimate, thus reducing credit supply by-9% next year. A failure to act and banks could be forced to sell as much as +$4.5t of their assets, forcing credit supply to shrink by a whopping-18% and allowing the vicious cycle of lack of credit and spending to continue. Fair is fair, the IMF did not wholly focus on euro’s plight. They discussed in detail the heavily indebted U.S. and Japan and the consequences of delaying their own policy adjustments. Soon we will be discussing the euro OMT program and its effectiveness versus outright QE that is being adopted by the Fed, BoE and BoJ.

Spain and Greece continue to hug the EUR headlines. If anything, Spanish yields want to move higher as the situation in both countries seems no closer to being resolved. Greek creditors remain at odds on how to tackle the country’s debt crisis, while the Spanish Prime Minister Rajoy seems nowhere near to seeking a bailout. Germany seems oddly promoting this timeline, Merkel has elections next year, maybe this has something to do with it? According to the Spanish Finance Minister, they continue to monitor and calculate the wider implications of perception in taking a handout. With the Eurogroup and Ecofin out of the way there is no indication of Spain asking for support or Greece receiving any breaks from its program. These actions have allowed the EUR to again trade back into no-man’s land. It’s that area of price making that lacks true market conviction -- a trading void.

Oct 10

Despite the weak longs being handily squeezed out in yesterday's price action, the techies believe they are back, establishing new longs of the single unit in the overnight session around the 1.2880 level. Again it is an offside entry point at the moment, which should indicate further caution on the trade. Their target is to print a 1.31 handle, however a tight stop ought to be favored. There seems to be a natural grouping of s/l just below the current handle point (1.28). Within the current price action, the risk reward does not favor the top, any bears would prefer to sell on rallies rather than at the current price level due to the market's lack of conviction. Day charts favor further weakness and diddling in the middle on no conviction ends up being expensive.

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