EUR/USD exchange rate exhibited a bit of a swing movement during the last week. After initially rising to $1.3135 the euro fell to finish at $1.3020 on Friday. This goes to a bit more than 0.5% euro appreciation for the week.
The single currency broke out on the upside of the symmetrical triangle that was formed on the EUR/USD daily graph. This was the expected outcome in our last edition of the EUR/USD weekly review. The euro almost touched the highest levels from the middle of September ($1.3160-70) but did not manage to surpass them. The European summit that was held during Thursday and Friday last week, discussed the European banking supervision and agreed it should be started not later than January 2013. The comments from the EU summit show neither Spain nor Greece were on the agenda. This failure to address any particular measures for solving the crisis in both countries was used as a reason by some of the market participants to collect their profits. Still, Luxembourg's prime minister, Jean-Claude Juncker, said:
"It is an important question for Spain it is an important question for the euro area... and we will make a decision on Spain in the next couple of weeks."
Commitments Of Traders
Noncommercial traders (those not using the futures for hedging their economic activities) increased their long bets on the euro with 5.24%. They also decreased their short positions with 15.09%, according to the last "Commitments of Traders" report.
The short positions are on their lowest level since January 2012. Their current number is about 43% below their average one for the year. The tendency of closing the short positions accompanied by an increase in the long ones is restarted, as can be seen in the following graph.
This change in preferences of short positions towards long ones shows a rise in the euro positive sentiment among the traders. However there is a bit of uncertainty seen since the end of September. Earlier in October some of the long positions seem to have been closed. This practice looks like a normal profit taking as the closing of longs was not accompanied by an equivalent increase on the short side.
Since May 2012 the ratio of long to short positions steadily increases. It currently is at 0.44 which is just a bit below the highest level of 0.51 seen near the end of September. The euro traded then for $1.2985.
The Week Ahead
The current week started with a fresh increase of the euro to $1.3060-70 after Spanish regional elections showed support for the policy of the Spanish Prime Minister Rajoy. Fiona Cincotta, City Index market strategist, said in a Reuters article:
"Now (Rajoy) has the support of his region perhaps he'll feel confident to actually press forward and ask for a bailout"
Monday's action in the EUR/USD currency pair hints how a possible Spanish request for a bailout would be perceived by the markets. It would remove part of the uncertainty. A bailout request will also put a start to the real actions the ECB officials said the bank would commit to when needed. Given the markets are hesitant on Europe's ability to deal in a fast and efficient manner with the current crisis, such a course of action would have the potential to boost confidence.
The investors could take advantage of their expectations of the EUR/USD exchange rate by a position in the CurrencyShares Euro Trust (FXE). The fund tracks the price of the euro measured in U.S. dollars. This ETF has an expense ratio of 0.40%. If investors expect the euro to appreciate a long position in the ETF could be used. It they favor a higher value for the USD a short position in the ETF could be opened.
Monday, Oct. 22
EU Greece Current Account (Aug.)
USA 6m Bills Auction
USA 3m Bills Auction
USA Presidential Debate
Monday almost lacks important economic events. The current account of Greece could be used as a hint on whether the country is walking in the path of restoration or not. A continuation of the previous increase would support the euro.
The 3m and 6m auctions in the U.S. are expected to show relatively no change from the previous yields.
The last presidential debate in the U.S. of the current election race could provide some volatility to the currency markets but such a volatility is not expected to last long. The debate could have a bigger effect on treasuries and stocks where the current election uncertainty has lowered the volatility and to some extent increased the yields on the longer term Treasuries, according to a Bloomberg article.
Update as of Monday, 16:30GMT: Greece current account showed an increase to €1.60B. The U.S. auctions saw a steady demand with a bid-to-cover ratio of 4.69 (3m) and 4.73 (6m). Yields were little changed. The highest accepted yield on the 6m bills was 0.15% and 0.10% on the 3m bills.
Tuesday, Oct. 23
EU Consumer Confidence (Oct.)
USA Richmond FED Manufacturing Index (Oct.)
A positive surprise of the consumer confidence in Europe would support the euro. An increase in the indicator (now or at the next release) would be a logical result given the last months of positive news flow from the European officials.
A surprising increase of the Richmond manufacturing index would support the euro as it would add fuel to the risk taking sentiment of the currency market participants.
Wednesday, Oct. 24
EU Germany Markit manufacturing PMI (Oct.)
EU Markit Composite PMI (Oct.)
EU IFO Expectations (Oct.)
EU ECB President Draghi Visits Germany
USA Markit Manufacturing PMI (Oct.)
USA New Homes Sales (Sept.)
USA FED Policy Meeting Statement and Press Conference
All of the European economic data releases presented in the table above are expected to show better values than their previous readings. A better than consensus value would support the single currency against the USD and vice versa.
The visit of the Mr. Draghi to Germany could present some increased short term volatility and trading opportunities. On the other hand, given that Germany has reiterated its position against using the ESM to directly fund troubled banks and countries for past losses, any change in that position resulting from the visit could have a long term impact on markets.
The consensus on the U.S. data expected to be released on Wednesday is also positive. The market expectations are for better than previous values. A negative surprise here would support the USD as a safe haven currency.
The market expectations for the FED policy meeting are that the last announced QE will be expanded to include government securities, according to a Bloomberg survey. This will further weigh on the value of the U.S. dollar against the euro.
Thursday, Oct. 25
EU Germany Retail Sales m-o-m (Sept.)
EU M3 Money Supply (Sept.)
USA Initial Jobless Claims
USA Durable Goods Orders (Sept.)
USA Chicago FED National Activity Index (Sept.)
USA Pending Homes Sales m-o-m (Aug)
A surprise on Germany's retail sales would drive the euro in the direction of the surprise as Germany is in the core of European Union and the health of its retail industry and spending is indicative of the possible growth of the EU.
The M3 money supply is indicative of possible inflationary pressures in the EU. An increase above the consensus value would support the euro.
Except for the initial jobless claims, the U.S. data is expected to deliver better values than the previous ones. If this happens to be the case the EUR/USD rate could rise as a result of increased risk taking sentiment. Any negative surprise would hamper growth perspectives and support the USD.
Friday, Oct. 26
EU Germany Gfk Consumer Confidence Survey (Nov.)
EU Germany Import Price Index m-o-m (Sept.)
USA GDP Annualized (Q3)
USA Reuters/Michigan Consumer Sentiment Index (Oct.)
A positive surprise on the Gfk consumer survey in Germany would support the euro by the same reasons a positive surprise on Germany's retail sales would. The consensus on the import price index however shows a lighter inflationary pressure to come from Germany. This does not support the euro in general but could support wealth growth inside the country.
The most important event on Friday is the report on U.S. GDP. The market consensus is for an increase. Given there are no negative surprises here this would support the risk-on environment in general and euro in particular. However such a high increase from the previous value could be hard to achieve given the flow of data from the U.S. economy was not so bright during the whole third quarter of 2012. Any negative surprise would support the USD.