The European Crutch Is Breaking

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

By Dean Popplewell

Obama winning a second term has increased expectations that the Fed will maintain its loose monetary policy for the foreseeable future. This has allowed global equities to climb, the U.S. Treasury to rally, the price of the yellow metal to surge and mighty dollar to fall. How long is this bout of risk trading to last? A critical vote in Greece on new austerity measures and structural reforms could deflate any new EUR confidence later today. Let’s not forget the U.S.’ Fiscal Cliff, it too is expected to dominate the first few months of Obama’s new term. Despite initial market reaction of risk-on, the proximity of the Cliff will dampen most buoyant of moods sooner rather-than-later, not allowing risk to gather a great deal of traction this time around.

Many expect the single units recovery to be short lived. The clear result of the U.S. election has certainly boosted pro-cyclical currencies; however, it’s anticipated that the "water" will be muddied by various political European antics. First up will be today’s Greek vote on its own austerity and reform package. The markets expect the vote to scrape through, as well as the more important budget vote on the weekend and again, this outcome is expected to be very close. This is obviously the event risk, however, the market still remains unclear if the EU will release Greece’s delayed +EUR31b aid tranche at the November 12 Euro-group meeting. Some euro member states prefer to wait for Troika to deliver its much-anticipated report before any monies are to be dispensed.

Gold bulls, it seems, have got their much-needed boost from Obama’s re-election. The fear of a weaker "greenback" is mostly to blame. Democrats keeping control of the Senate and the Republicans the House is also ending up being a plus for long gold positions. Why? This political mix promotes gridlock; potential threats of any impasse are not good for the Fiscal Cliff or future debt ceiling changes. With the status quo in the White house restored, the fear of a more hawkish central banker being at the helm of the Fed has now dramatically reduced, allowing precious metal prices to rally. Even talks of extending Operation Twist and images of the currency printing press at full speed have gold bulls fearful of currency debasement and inflation. However, the bulls should be weary of India demand (largest consumer of gold for wedding’s etc.). The country is in the middle of a festive season, which will peak next week and means immediate buyers are non-existent. Analysts are also fearful that India’s gold imports could fall -45% this year because of individuals' disposable income being "decimated by domestic high inflation."

Euro data is a curse onto its own, and it’s this alone that can be blamed for putting more pressure on the EUR this morning. Eurozone retail sales fell in September (-0.2%, m/m and -0.8%, y/y), reversing the previous month’s rise, and suggests that policy makers' hope for a rebound in consumer spending to drive the region's economic recovery is now questionable. The market had hoped for better, especially after last month’s consumer confidence levels rising and this despite remaining below the long-term average. Even the German IP headline was horrible, falling -1.8% vs. expectations of -0.5%, m/m. Weaker than expected industrial orders data coupled with PMI data all point towards further weakness in IP numbers. This morning’s release further underscores the fear that the German economy is starting to weaken progressively as the eurozone finally takes its toll. The European crutch is breaking!

Nov 7

If the weaker EUR shorts did not exit their shorts before the vote counting, then they were certainly taken out in the first wave of dollar negativity provided by Obama’s win. Most punters are flat and are waiting to gauge reaction to the Democratic win from the Americas. A EUR base has been firmly planted in the 1.2760’s. The market has tried to run for the 10-DMA-line, around 1.2895. However, there is good interest to want to sell at these elevated levels. A clear break above the psychological 1.29 break line and market momentum is again staring at the 1.31 range. This morning’s horrid euro data should have the single currency trading on the back foot again. With Greek event vote risk on the horizon, expect better selling on EUR upticks until there is a real threat to break out of current range.

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