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Top Reasons Stress Tests Could Spell Doom For The Markets

|Includes: BAC, C, DRV, FAS, Direxion Daily Financial Bear 3x Shares ETF (FAZ), GS, JPM, QQQ, SPY, WFC

On Friday at 16:00 GMT, the European stress tests results will be released. In the past few weeks, EUR/USD enjoyed weak American data, and also enjoyed the anticipation for the European stress tests. With the terrible European debt crisis, these results are supposed to show that the banks are stable, and to mark the end of the crisis.

But it doesn’t have to be necessarily so:

  1. Learning from the past: The American stress tests that were conducted over a year ago, were positive, but didn’t boost the contrary. The dollar continued falling in May 2009, and this trend continued for many months. The explanation was risk appetite trading – traders felt relieved and went for more “risky” currencies, and also stocks.
  2. Methods: The methods of these stress tests are unclear. The European authorities will probably publish some of the methods, but it might not necessarily convince everybody that these tests are serious.
  3. Sell by the fact: The Euro already rallied in anticipation of the expected positive outcome. It could easily be a case of “buy by the rumor, sell by the fact” – a Euro sell off can possibly begin after the results are released.
  4. Timing: The results are released at 16:00 GMT on Friday, as the London session ends. As it often happens on Fridays and also last Friday, many traders avoid holding “risky” assets over the weekend. The Euro could drop regardless of the stress test results.
  5. Bad results: While the expectations are for positive results, with a vast majority of institutions passing the tests, this isn’t guaranteed. A scenario of gloomy results cannot be ruled out.

How do you think that the stress tests will impact EUR/USD?



Disclosure: Long FAZ