EUR Black Hole Threatens to Deepen

by: Dean Popplewell

The term "fiscal cliff" is dominating most trading activities, thoughts and investor actions. Asian and European markets have and are seeing "red" as the markets fixate on the new go to buzzword. Concerns over the U.S. fiscal cliff will remain at the forefront as the market heads stateside, even overshadowing the upbeat data released there yesterday, including the narrowing of the U.S. trade deficit to its lowest level in 24-months. The EUR, trading within striking distance of its two-month low, continues to look vulnerable, particularly since Greece’s next tranche of financial aid is hanging in the balance this morning.

Earlier this week the Greek government barely approved the austerity measures needed to unlock more aid to avert bankruptcy. Analysts note that the bill covering the bulk of the monies is a precursor to next year’s budget law, which the government is expected to push through this weekend. Greece seems to be banking on the euro-finance ministers meeting next Monday to agree on releasing the next tranche of loans. However, there are rumors that no final decision will be made, blaming the lack of clarity on how to make Greece’s massive public debt sustainable. Euro officials are going out of their way to insist that there will be no accidental or any other Greek default on November 16 when a large amount of treasury bills come due.

Overnight data has had a push-pull affair with risk it seems, just like the Chinese economic data painting a mixed picture. The country’s CPI rose +1.7% on the year last month, below market consensus of +1.9% and sparked speculation that the world’s second largest economy has room to undertake more monetary easing. Other domestic data was upbeat, industrial production (+9.6%, y/y), fixed asset investment and retail sales growth (+14.5%, y/y) all accelerated last month. Stronger domestic macro data should see some CNY appreciation, which in turn should have positive knock on regional impact on currencies.

Industrial production in the euro’s third largest economy, Italy, fell in September (-1.5%), led by declining energy output; less than the -2% monthly fall expected. In the U.K., the trade deficit narrowed (-GBP8.4b vs. –GBP10b) more than expected for the same month, due to healthy exports of chemicals and the biggest fall in imports in 9-months. These are two very different economies, operating under the one union. However, the U.K.’s immediate objective is to isolate itself from the eurozone crisis. One way of doing this is by boosting trade conditions outside the EU epicenter. The winning results are in this morning’s numbers.

Nov 9

Most punters are flat and are waiting to gauge reaction to the Democratic win, both U.S. parties' reaction to the U.S. Fiscal Cliff question and the mixed economic data both side of the Atlantic. The more waiting, the more leaking the single unit seems to have. Some specs happened to buy the EUR yesterday, sitting long around 1.2740-50 believing that the recent consolidated sessions are a sign that the market is oversold. Already this morning the EUR has tried to disprove this notion by straddle trading its two-month lows. The spec punters are looking toward the 10-DMA of 1.2850 as their exit point. However with Greek event vote risk on the horizon, the market should expect better selling on EUR upticks until there is a real threat to break out of current range.

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