Safe To Sell EUR In The Hole?

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Includes: ERO, FXA, FXB, FXC, FXCH, JYN
by: Dean Popplewell

By Dean Popplewell

The former Greek Prime Minister’s latest remarks have the EUR bears chasing their selling orders, dragging them down from above 1.28 to place them into the wilds of the 1.27 highs. It seems that for the potential EUR bull candidate, the application of risk is both a fleeting and daunting undertaking. Just when you are about to buy into that specific trading reward strategy, an ill-timed exit statement by an ex-Hellenic leader, has the EUR bears sitting more comfortably ahead of today’s all-day EU Economic Summit. Greece has no choice but to stick with a painful austerity program dictated by its lenders or face an exit from the eurozone that would destitute the economy, send inflation soaring and generate new social ills. The everlasting reaction has managed to push the EUR to new two-year lows this morning.

It is worth remembering that many other high-yielding currencies fared far worse on former PM Papademos comments. The Pac-Rim, Mexico and eurozone growth currencies, with strong trading ties, all managed to trade a lot lower, and a lot quicker outright. Sometimes it pays to look beyond the EUR to express your market negative sentiments and consider other risk averse trading strategies to maxamize the bang for one's buck. Currently, this may be the right time to witness sustained EUR weakness. The currency has been in demand of late by buying support through diversification from the Middle East and China. However, with energy prices lower and Chinese data softening, the single unit has the perfect opportunity to exceed this morning's 21-month retreat.

Today’s EU summit is shaping up to be an event risk that will come and go and have very little to show for itself. The new French President has already indicated that Eurobonds would be discussed, but a senior German official has “reiterated” that Berlin did not believe that jointly issued EZ bonds were the Euro-solution. Like most Euro meet and greet events, there is expected to be a compromise in the proceedings with a discussion of bond issuance for project finance. However, such a program would likely be too small to spread out over time to have a big affect on euro sentiment. It looks like another potential euro posturing event that brings forth false market hope. Expect both the technicals and fundamentals to dictate ongoing EUR direction, and not the euro leaders. With the absence of more constructive measures should allow the EUR to kick on to test the barrier supported EUR outright handle of 1.25 in the medium term.

In the overnight market, other Central banks were busy during their own time zones. It was not a surprise to see the BOJ keeping its monetary policy unchanged, standing pat with the overnight rate at +0-0.1% as expected. The AP (asset purchase) fund and credit loan-program were also kept unchanged at +JPY40t and +JPY30t, respectively. The Japanese Finance Minister Azumi said that he expects further BoJ easing to help achieve the +1% inflation target. Euro event risk continues to put the squeeze on monetary authorities when it comes to yen valuation. Risk averse trading strategies has the BoJ on its toes, with the market continuing to stretch authorities patience and JPY’s value even higher.

This morning’s BoE MPC minutes showed that several voting members came close to voting for expansion of its bond buying stimulus this month. Eight of the nine members voted to leave the program of government bond buying or QE unchanged at +GBP325m. The finely balanced decision may mark a pause in, rather than an end to, the program. The IMF yesterday suggested that the BoE consider boosting the program and consider cutting key interest rates below the +0.5% threshold. The UK economy has just entered a technical recession. Not aiding the BoE current stance was this morning’s Retail Sales posting the biggest decline in more than two years last month (-2.3%, m/m and -1.1%, y/y). The steep decline highlights the ongoing squeeze faced by UK consumers as they struggle with high inflation and subdued earnings growth in a technical recession. The EUR/GBP short remains in play with the recent technical bounce being overdone. It’s all about picking the best of a bad lot!

Expect the enthusiasm for the EU summit, partly responsible for some of the gains in the global markets in the last two sessions, to continue to falter. The EU show of "dinner force" at the summit remains weak and the market’s hesitance to own EUR’s outright, even at such low levels for a percentage play is telling and screams for the currency to be committed to below new two-year lows sooner rather than later. Of course, this also depends on what hand Eurocrats will deal the market!

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