ECB or the EUR to Crack?

With little data out today, this morning’s market movement has been driven mostly by talk of ECB demand for Italian debt in the secondary market. The weeks trading decisions have been dominated by Euro yield movements and the Bund spread. If it was not an Italian problem, then it was Spanish or French. Intra-day trading has mostly been a carbon copy of the day before, little change in theme, same toxic variables, and a market all thinking they want to apply the same trade ‘but not at these levels’.

In FX we have witnessed a market suffering a slow motion meltdown. With CHF out of the equation, because of the SNB actions, the USD and JPY have gained significantly against the EUR, commodity bloc and EM currencies compared to this time last week. The surprise to most has been how orderly and gradual the moves have occurred. Normally, with any risk aversions trading strategy decision, “Panic” seems to be the outlier as investors all run for the exits at the same time.

Analysts attribute the relative stability in the currency markets to three factors, “positioning, reserve manager activity and caution over potential policy response”. We should be able to throw in other adjectives like jaded, clueless, resigned and fearful. There are obviously many more.

What have we got to look forward to in the short term? Presently, the EU policy process remains adequate for preventing worst case scenarios in the Euro-zone, but for how long? It’s all about capital market confidence and the public Franco-German spat over the legal and political role of the ECB does not help. With the ECB not acting as a crisis backstop, risk reward remains favorable for the dollar and yen. Stronger US fundamentals are not part of any equation, albeit a prerequisite, they are not yet a trend and remain vulnerable to consistency due to the Euro-sovereign debt crisis.

The pressure on the ECB to resolve this crisis is reaching a tipping point. Something has to give, either the ECB cracks or the EUR. Place your bets!

Forex heatmap

Other Links:
France and Germany break ranks over ECB intervention

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