EUR Pessimism Overdone?

The EUR is riding the luck of the Irish early this morning. It has met little resistance in it’s first meaningful rally in a while. Even Euro equities have managed to trim their biggest monthly drop in nearly a year yesterday, as polls showed Ireland will back measures to contain the debt crisis. Maybe a bit of a concern is the polling margin may not be sufficiently wide enough for a slam dunk. There have been too many ‘undecided’ being counted up to today’s election. The market will have another 24-hours to wait for full results tomorrow. A ‘no’ vote would likely add to the political uncertainty in Europe, with negative implications for risk appetite. However, an Irish rejection does not affect the ratification process, only 12 out of 17 euro area members are needed to ratify the treaty for it to come into effect. By just saying, ‘yes,’ provides a backstop to the Emerald Isle, making it easier for them to access capital markets.

Many in this market expect the EUR to get worse before its gets better, with further losses in store for the single unit. It seems that the record shorts remain comfortable with their positioning even amongst event risk. Currently, the markets are hanging on the ECB’s every word about Spain. Without decisive action by authorities to “stem the rot,” sellers of Euro assets are expected to reconvene. Markets are both technically and fundamentally taking a small breather. Many investors remain skeptical about the various measures being put forward this week by the European Commission. For instance, the banking union, and the direct recapitalization of banks through the permanent ESM. Despite maybe convincing markets that policy makers are trying to move in the right direction, all potential plans are moot without the backing of Germany or Finland. A euro solution remains a team effort!

Labor markets out of Germany this morning have helped to underpin some of the bullish actions we are seeing amongst the various asset classes. Germany’s seasonally adjusted jobless rate fell to a new record low this month, +6.7%, the lowest print in 14-years. Even German retail sales surprised market expectations on the open with a +0.6% strong print. Both headlines underline the country’s resilience to the euro-zone-debt crisis. This has helped the periphery euro-zone sovereign yields to open marginally lower, but still close to the record high levels reached yesterday. Fundamentally, a lack of supply and limited economic data may help to ease some of the recent market pressure. However, heightened tensions in Spain’s banking sector and increased talks of a Greek exit helps keep the market vulnerable to a continued selloff. Record low German yields is beginning to force investors to shift and seek other safe haven strategies. FX is all about following the money!

From a technical perspective, despite the EUR rallying off its lows, bearish momentum remains. Expect a strong percentage of profit taking to have taken place close to recent lows on the back of yesterday’s overall negativity. Again, many bears will be expected to recycle their negative views by selling the single unit into these rallies, looking to establish a new target that sits on top of the 2005 trend line of around 1.20. The market now believes the first real support comes in ahead of the 1.23 level.

The retail sector continues to like their longs. It seems that many rode yesterday’s wave of negativity and stayed long. For some, risk management must be questionable. The contrarian market viewer would agree with the accumulation of EUR’s at this new yearly low. The single unit’s value is within touching distance to where it stood two years ago (May 2010, 1.2300), when Europe’s sovereign debt crisis was just getting into full swing. Even with a plethora of bad Euro news over two years, the currency does trader higher! Is the market trying to tell us that the unit’s value is more attractive than back then? The retail position taking is telling us so!

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Weak Stops Where?