Expect the EUR to Disappoint

The bids keep coming so far this morning, mostly a hang over from a better than expected US non-manufacturing ISM yesterday. This even despite Moody’s cutting the credit ratings for several Austrian and German banks while citing the usual disclaimers. This current risk-on environment has gotten a further boost from the Aussies Q1 GDP growth surprise print overnight weighing in at +1.3%, q/q. It has helped that the backward growth reporting was also revised higher. Until now, this market had been desperately looking for something to sink its teeth into. Applying a trading strategy around if Spain asked for help officially or unofficially has been rather expensive.

Europe is at least consistent, they are slow to recognize, slow to formulate a response and slow to implement. Yesterday’s G7 Finance ministers emergency call was a bust with no concrete solutions being presented in preparation for the upcoming G20 meet. Spain wants changes to European rules to be able to get aid for its banks without the stigma of a formal request for help from the EFSF. However, no decisions can be made about recapitalizing Spanish banks until the first phase of an independent banking audit is completed later this month. Perhaps by then, Spanish official may all be on the same page, while European officials may be a tad quicker to react.

Global financial markets are buoyant this morning ahead of the ECB rate setting. Investors are hoping for some action from policy makers after the crisis in the Euro-zone has worsened in recent weeks. Spanish funding costs continue to rise while the Greek political situation remains questionable ahead of its pending election. There seems to be a shift towards more global stimulus. Many expect that data from China this weekend will trigger further monetary stimulus from the PBoC as well as more support for ‘smarter fiscal stimulus.’ The Fed’s not immune, weaker domestic US data added to the ongoing Euro woes have made policy action a possibility again. The problem with stimulus this time round is that in the developed markets the effectiveness of QE is being questioned while in the emerging markets there is an aversion to being aggressive given elevated inflation expectations and currency weakness.

The percentage play going into this mornings ECB meeting is to expect disappointment, but be ready to be surprised if policy makers take a more aggressive stance. Many analysts do not expect a change in either policy stance or key rates. A no change has the potential to again pressurize the EUR as investors focus on “tail risks” arising from the euro-zone crisis rather than the traditional monetary policy measures. If there were a surprise with policy makers standing firmly behind the EUR then that currency rise will trigger many stop loss short positions. The favored action would be for he ECB to leave the door ajar for further policy measures that could be implemented if political leaders make progress in solving their crisis.

June Pos

With an ECB continuing to maintain a loose policy the effects of the EUR are firmly to the downside. Rate cuts do not seems to be the solution as the effectiveness is becoming more questionable. Perhaps another LTRO is finally within our midst? The retail sector is taking this market uptick as an opportunity to sell EUR’s again. They have called it correctly over the past ten trading days, preferring to go long when the EUR looked at its most vulnerable. This new established short is their first in a while. Technically the marketing is trying to work itself lower after capping its high in Asia. The hourly studies have rolled over from being overbought, allowing for further downside risk to develop. Whatever occurs, be nimble, be flexible, do not marry a position, all of this allows you to fight another day!

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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