Euro Looking for Direction

Includes: FXB, FXC, FXE, FXF, FXY, UDN
by: Ralph Shell

The retreat of the euro which began Friday continued in this morning's trade. The previous pervasive bearishness had culminated with a sell off under the 1.19 handle in early June. Then, the large specs, probably various types of funds, were short 100,558 contracts, futures and options combined, compared to a more manageable 38,451 contracts in the most recent report. The short buying was in part was responsible for the 850 pip run up to the 1.2750 level. Now a diversity of opinions remains, with some analysts looking for a return to 1.35, and others swearing the current rally will be short lived as the pair is destined to trade at 1.15.

Later this week there will be some economic reports in the US, Trade Balance, the monthly federal deficit for June, and retail sales. These reports are expected to provide clues how fast the US economy is faltering, and by themselves will not be of sufficient importance to jolt the market. In Europe the bank stress tests and the results seem of paramount importance. We are curious, however. Does the outcome of these tests depend on the severity of the tests as administered by the central bankers? And what is the Central Bankers' goal?

No doubt the German car makers would be happy if there was wholesale failure of euro banks with the stress tests. The euro weakness is a bonus for these auto manufacturers. BMW reports they anticipate much better earning overseas, and they are hedging their currency profits through 2012. This probably means they are selling USD and buying the euro.

The progress of sovereign debt sales will be observed closely. In the US, the Treasury will auction $69B of 3, 10, and 30 year paper. With the US still basking in the popularity of their safe haven status, all is expected to go well with these sales.

Europe may find the pending auction results a little dicey, however. Leading off the week is the sale of €1.25B 26 week bills by Greece. German 6 month bills are trading at .42%, so it will be interesting to see what premium the market demands, but 26 weeks is not a long time when the ECB is busy propping up the Greeks. Later in the week, Italy, Portugal and Spain are all peddling some debt. It is expected the euro central banker will want these sales to go smoothly, and if they do this might be a reason for a recovery in the euro.

Barring some decisive news, it looks like the EUR/USD can be a choppy two sided affair. After the recent sell off, we want to try the long side. The ideal entry looks to be in the 1.25 area, but fear we will be unable there so we will try a half unit at 1.2555, with another at 1.2505. Stop protection in the 1.2440 area with a tp the 1.2750 area. The following is a 1H chart.

Disclosure: No positions

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