A EUR Range Play?

It seems market participants are grappling between the desire to pick up some bargains following last weeks heavy equity declines and concerns about global economic growth. Despite some better news over the weekend that Germany does not intend to step in the way of the EFSF and EMS bailout funds to be combined to boost the regions firewall facility, it was Monti’s comments about Spanish concerns that could reignite Europe’s debt crisis has the EUR trading on the back foot after surprisingly stronger German data this morning.

German ifo index for March came in better than expected at 109.8. It was the fifth consecutive increase, and on the face of it, points to a modest increase in activity. However, “The near term risks remain skewed to the downside as oil prices might weigh on business profits and external demand remains sluggish, especially from other main euro-zone countries that suffer from a technical recession.” The markets initial reaction was to see a jump in EUR outright to just short of Asian overnight highs (1.3285). It was here that fresh intraday shorts took advantage of the spike.

Again, the market has lacked the impetus to breach the 1.33 option barrier trigger point. The unwillingness of many to make any more bold moves after last weeks disappointing US Industrial production numbers and Chinese and Euro-zone PMI’s has allowed Middle Eastern names to push the the single unit to test its daily low just below 1.32. Many this morning have been playing the range, pulling bids back, joining the stop-losses close to these levels while others have been gradually taking back their quick post ifo profit. The technical analysts will tell you that true support comes in around 1.3170 (10-day moving average), a region where there is sure to be stops below. Option expiries on the topside at 1.3250 will again bring in some Middle eastern selling names.

Markets focus by week’s end will be twofold. Ahead of the Euro group meeting, Germany is reportedly ready to allow a temporary increase in the overall euro-zone bailout fund. The compromise would allow the already existing commitments of the EFSF to run in parallel with the full lending capacity of the prospective ESM, boosting overall size available to about +€700b. If this plays out accordingly, the market can expect some relief. Last week’s flash estimate of Chinese manufacturing PMI suggests that the official PMI (at the end of the week) will likely fall in March. However, with the Chinese New Year holidays being in February for four out of the past five years, historically the official PMI tends to rise by +2.9 points in March from February. A result above 50 and the market should expect some Asian currency relief. So far, the market has only the enthusiasm to play the range.

Other Links:
Quarter-end pushes USD repricing