Sell EURs and Shut Your Eyes?

This month and year may be winding down, but the heat on the Euro-zone is certainly becoming more intense. Investors are trading up against some key support levels for the currency, levels that when breached could see another decent run to the downside. Historically, the risk reward of holding large positions this time of year tends not to be worth it. The aggravation and headaches of trying to comprehend some of the currency moves, which tend to be driven by lack of liquidity, year-end positioning and the turn, usually dissuades most from having larger positions. Mind you, this negative EUR run has technical ‘stamina’ and traders are required ‘to pay to play,’ otherwise we will end up talking about the ‘opportunity cost’ or the big one that got away!

All week investors have been concerned about the demand for periphery sovereign debt. This morning the market took down German and Italian product and is waiting for the Spanish issue tomorrow. The Germans sold +4.18b 2-year notes and paid the lowest yield (+0.25%) for 2-year product since the inception of the EUR. The bid-to-cover was 1.4 versus a four auction average of 1.1. The Italians on the other hand, in contrast, paid a Euro era record yield of +6.47% to sell +EUR3b five-year debt, adding to concerns that an EU summit last week had made little progress in tackling the region’s debt crisis. The country has done little to ally fears over its ability to continue to raise funds at sustainable levels. It’s estimated that they need +EUR220b’s worth of bonds next year. Tomorrow, the market has Spain to deal with, and their auction is not expected to yield any different results.

The Euro “high” returns have heralded fresh EUR sales this morning. Currently, option related bids are supporting the figure (1.30), however, further weakness cannot be ruled out with stop-loss hunting expected to be triggered below. This mornings Euro-zone factory output data disappointed, falling on the month (-0.1%) and registering its weakest annual gain in nearly two-years. Production rose +1.3%, y/y, the weakest increase in two-years and well below street estimates of +2.1%. Weakness in the Euro’s manufacturing base reinforces the regions concerns on the health of their economy. The auction results did provide some temporary EUR support, however, sustaining these gains remain a tough ask as selling strength is market preferred.

Yesterdays FOMC meeting delivered no surprises. As expected, they kept policy unchanged with no mention of new communications strategies, discount rate cuts or of QE3. It was noted that key sections of the FOMC policy statement were identical to the statement issued on 2 November. With Europe under so much pressure its now a guessing game “when” QE3 is required!

Forex heatmap

Other Links:
CAD and AUD at the mercy of Euro Rhetoric

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell