Why the Euro and EU stocks continue to prosper despite a worsening fundamental picture, likely EURUSD trends in the coming week and how to profit for stock, forex, and forex binary option traders
Of the big 3 crises on the scene, the EU, MENA/oil prices, and Japan, many including myself believe the EU sovereign debt and banking crisis packs the biggest market threat.
Like a Teflon coated frying pan, EU stocks and the EUR have repelled repeated blemishes over the past week from a worsening fundamental and mixed technical outlook.Deteriorating Fundamentals
For the PIIGS nations, the situation is getting worse.
- Portugal Collapsing:
- Spiking bond yields
- Sovereign credit downgrades from all major rating agencies, more may follow
- Failure to pass an austerity budget and the subsequent collapse of its government and resignation of PM Socrates. By Portuguese law there can be no new government authorized to negotiate a bailout for at least 55 days until the beginning of May
- Ireland Worsening: Q4 GDP contracted 1.6%. Meanwhile we still have an Irish freeze on additional cash injections to its insolvent banks until Ireland gets a better bailout deal, raising the risks of an Irish bank default and subsequent contagion scare that could hit hard at the German and UK banking sectors, which have the most Irish bank debt exposure. Germany has insisted Ireland relinquish its low corporate tax rate in return for any new concessions. We don’t expect either side to back down until a bank default is imminent.
- Irish, Portuguese Bonds Hit: LCH Clearnet, the leading clearinghouse for EU sovereign bonds, raised margin requirements on Irish bonds and no longer accepts Portuguese bonds as collateral, reflecting justifiably deteriorating confidence in these nations
- More Pain In Spain: Moody’s downgraded credit ratings of 30 Spanish banks
To compound the threats to the recent EUR rally, the common currency is at 15 month highs, a technical condition which begs at least some kind of pullback unless there are new positive fundamentals to push the EURUSD through current 15 month resistance around 1.450.
EURUSD WEEKLY CHART COURTESY OF ANYOPTION.COM 03MAR27 0345
A look at a EURUSD weekly chart shows a mixed technical picture.
- The bad news: The pair has formed a bearish double top.
- The good news: There are solid bullish short term momentum indicators like:
- Bullish moving average crossovers: the 10 (blue), 20 (yellow), and 50 (red) week EMAs are all rising and have crossed above their longer term counterparts, including the 100 (purple) and 200 (pink) EMAs, or are about to do so.
- The EURUSD remains in the upper Bollinger Band ‘buy zone,’ the area between the top 2 Bollinger bands, which suggests the uptrend still has room to run.
Despite the very negative fundamentals and mixed technical picture, the EUR not only held its ground, it briefly tested 15 month highs around 1.4250. Why?
The short answer: 2 factors creating a positive near term risk/reward picture of the Euro.
- Rising rate hike expectations – there will be greater reward for holding the Euro. Moreover, the EUR currently has the highest 12 month yield increase expectations of any major currency. Markets expect an additional 0.25% added to the EUR current 1.00% short term rate, expect to see that rate up to 2% in the coming 12 months.
Chart Courtesy of dailyfx.com 01MAR25 1428 d
- A consensus belief that for the coming weeks at least there will be no default threats. While the EU Summit is not expected to yield major progress towards resolving the EU sovereign debt and banking crisis, the summit has held out some hope that it could address the near term risks posed by the above 4 threats – i.e. stable risk levels.
In sum, markets believe the risk/reward picture for the EUR is improving in the short term. There’s a rate increase likely by April 1st, and no default risks in the coming weeks.Coming Week EUR Outlook
As we predicted, the much anticipated EU Summit that ended Friday made no significant progress towards resolving any of the above, nor will there be any as long as there is no imminent default threat. See 7 Stages of the EU Panic Cycle: Understanding and Profiting, Part I for details.
The EU bailout fund has enough cash on hand for the anticipated Portugal bailout, estimated to be between 75-99 bln Euros, (around 9 billion through June) so markets see no immediate threat. The cash will be there, because Spanish banks have the highest exposure to Portugal, about 61 bln Euros, the bulk of that held by Spain’s most important (and thus too big to fail) commercial bank, Santander.
However the current temporary bailout fund has only about €250 billion available to lend despite being backed by €440 billion in guarantees. EU leaders have said they’ll adjust the fund so that it can lend €440 billion, but there is disagreement on how. In other words, the cash isn’t there yet, so after Portugal, there will be little left for any unanticipated trouble.
So barring a significantly negative surprise, expect the EUR to at least stay in recent ranges as ....
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DISCLOSURE & DISCLAIMER: AUTHOR SHORT THE EUR FOR PERSONAL PORTFOLIO. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER