Is The Euro Making A Bottom?

Includes: FXE, UDN, UUP
by: Ralph Shell

When traders get really good and bearish, how often does a market then turn around? I have often felt that it is the markets' function to fool as many people as possible. After all, if it were easy, everyone would be a trader.

The euro versus the USD, aside from a few minor rallies, has been in an orderly decline since the tweeser top October 17 and 18. Then, after lower markets early in the week, we get a turnaround on Wednesday, taking us higher for the week.

Fear of a potential Greek sovereign debt default seems to have been the catalyst for the most recent sell-off, however, the Greeks sold €4B bills yesterday. It was reported in The Telegraph:

....(the) "successful bond auction cheered traders, despite warnings that Greece may have to hold another emergency auction to raise the final €1bn needed to redeem the €5bn bond due on Friday. Greece's finance minister, Yannis Stournaras, admitted there was still a 'very high' risk of default, even if Athens meets its obligations this week."

Since most of the bailout money that goes to the Greeks is really a rollover of maturing debt, we have to assume the money will show. The Greek bailout is mostly a debt refinance scheme. Bankers, like lawyers, seem to protect their own.

Debt holders and financial people may be applauding the latest rescue from the abyss, but there are demonstrations taking place in Spain, Portugal, Greece and Italy today. These protests have been organized by labor unions across Europe to object to austerity measures. There have been flight cancellations -- 600 in Spain, and 160 in Portugal -- and smaller union demonstrations in France, Belgium and Poland.

It is now a little after 4 p.m. London time as I write this, and the red numbers in the global equity markets are expanding. Should this continue, it is hard to see the bounce in the euro getting very far (FXE, UUP, EURUSD), but an equity turnaround might send the euro higher.

News from the U.S. has not been constructive this week. Today, the retail sales number was a drop of 0.3%, explained in part by the disruption caused by Hurricane Sandy. The core U.S. PPI (Y/Y) was up less than expected at +2.1. Lower energy costs were given as the reason. Late yesterday, the U.S. Monthly Budget Statement for the first month of the fiscal year reported a bloated deficit of $120B. Spending was up 16.4% from the previous year.

We know the European market has been slumping, but that may be priced into the market. Remember too, the specs are big euro shorts. If it looks like we are headed for a higher weekly close, they may want to take money off the table. My inclination is to be close to even in this pair. A return to the 1.2850 level would tempt me to be a seller again.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.