EUR Positions Remain Offside

Helicopter Ben’s remarks yesterday morning on the US job market are being considered his most dovish stance to date. The dollar for most of this month, so much in demand, continues to underperform, triggering stop losses outright against its major trading pairs. Currently, the EUR trades north of the psychological 1.33 level, eyeing 1.34 where option barrier offers are now looking to try to slow this upside advance. This squeeze is making the weaker EUR bears rather nervous.

Bernanke’s comments are being used as a ‘cure all’ for many investors grappling with uncertainty over the state of the global economy. Agreeing that most of the success in the job market was a function of declining layoffs rather than increased hiring has helped to keep alive the quantitative easing sentiment as well as ensuring that the Fed would keep a heavy foot on monetary policy. What did Ben mean by “continued accommodation” yesterday? It’s this phrase that is very much open to interpretation. It could mean either a delay in their exit strategy of current policy or hiking the Fed’s fund target. The FI dealers could argue that policy makers are not comfortable with the “twist’s” expiration at the end of June, heightening speculation of introducing QE3. Bernanke is playing into the majority of investors ‘who believe in reverting into the low yield environment by an ever growing series of QE’s. Many investors are embracing his remarks literally, allowing themselves to boost their risk tolerance and push global equities higher.

Adding further support to EUR sentiment this morning, data revealed that French consumer sentiment rose sharply and unexpectedly (87 vs. 82) in March to a level not seen in twelve-month. Rising consumer confidence is always good news. However, prospects for future spending remain relatively weak the world over, as purchasing powers remain undermined by uncertainties about future activity and weak labor markets. Both the Spanish and Italian debt auctions were themselves well received, and managed to push yields lower. Is it only a matter of time that the ‘band aid for a bullet wound’ starts to bleed again? Spain is very much in the capital markets firing line and the natural contagion reaction would suggest that Italy in only steps behind. For now its easy for the market to focus on positioning.

As the above diagram reveals, investors continue to trade overweight short EURs, a position that was added too once the psychological 1.33 barrier was penetrated yesterday. The market had not anticipated Bernanke to err so heavily on the side of dovishness. Ever since, bearish investors have been adding to their shorts, more in hope believing that this is as much of a squeeze we can expect. However, positioning, fundamentals and technical analysis would suggest that there is at least one good EUR pop left in this market before the dollar finds its friends again. For the weak bears, they can only hope that the EUR is close to its medium term top.

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Dovish Bernanke Punishes the Dollar