For the past two days this market was willing to apply risk. Investors were encouraged by the “highly accommodative rhetoric” from Fed Yellen and the BoJâ€™s Shirakawa pursuit of “powerful easing” to overcome deflation. Throw into the mix stronger Aussie employment, higher demand for Chinese loans and even better than expected industrial production expansion from the Euro-zone had many of the EURâ€™s bears concerned. In reality, outright short EUR positions have been less threatened because of the contained currency price action being dictated by option dealers and their expiries. Itâ€™s “Freaky Friday” and we have a new threat to risk. Will the short EUR positions now get what they deserve? Even direction vindication would appease many.
Spain and China are again the threats to risk this morning, itâ€™s not new, however, macro evidence is hopefully building for a currency blowout. Traders require volatility, not inching ranges. Chinaâ€™s first quarter growth slowed to its weakest pace in three-years, while Spanish banks seem to be relying more on the ECB for funding. Their borrowing requirements for March jumped to new record level highs (+EUR316b vs. +EUR169b) from February. The countryâ€™s figure represents almost +28% of the total borrowing by all Euro-zone lenders. Whatâ€™s the market to think? Spain seems to continue to struggle to raise funds from the whole sale markets. This scenario will not help the pricing of Spanish CDSâ€™s, whoâ€™s spreads continue to threaten new record wides.
Chinese data showed GDP growth slowing to +8.1% in Q1 from +8.9% in Q4 and below consensus expectations of +8.5%. It was the slowest pace of growth recorded in three-years. Add this report to some of the other regional poor numbers recorded this year and it seems the market will have to postponing or push out Chinaâ€™s bottoming out process beyond this summer. Again, the market will be raising the question of â€˜hard or softâ€™ landing for the worldâ€™s second largest economy? Weak GDP growth along with subdued inflation open the window for more policy accommodative stimulus to boost domestic demand. Expect monetary policy to remain center stage and already the market expects two-25bp RRR cuts for the remainder of this year.
The world again is willing to rely on global easing. Shirakawa is committed, Vice-chair Yellen warrants it, Draghi requires it and Zhou will probably demand it to kick start the â€˜flagging health of the worlds largest economies.â€™ Lackluster fundamentals and large equity swings are being interpreted with a hint of skepticism, bond pressures are justifiable, however, expect the FX market to be playing catch up with the other asset classes soon.
From a technical perspective, many still like buying EURâ€™s on dips. However, the currency is under pressure on the crosses on the back of poorer fundamentals. For most of this week, price action has been dictated and contained by option demand. Outright support remains close to 1.3140, with stop-losses below opening the figures vulnerability again, while topside, the figure has Middle-East EUR interest to go.
Options and Yields Confuse EUR Positions 
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