Ben to crush EUR’s hopes?

Who of note is brave enough to land that first punch? No disrespect to the Aussies. It seems that global policymakers are about to be engulfed by world events again. Will they be sinful of taking a reactive rather than a proactive stance when its time for ‘their’ solution? The G7 emergency call this week recognized the increased risks of a Spanish bailout. However, that appears to be as far as it went. The group agreed to monitor developments closely, but did not announce any coordinated action to stop the rot.

There is certainly pressure on the ECB to ease policy some more, especially if it is to prevent the region’s banking problems from imploding. However, Draghi seems to be endorsing a go slow policy. Why? The bureaucrats are reluctant to move too soon and reduce any pressure on euro-zone politicians to start implementing measures of their own. This indecisive action has hurt the EUR a tad overnight, but, the downside appears to be limited before Bernanke’s much-awaited testimony in congress this morning.

After last week’s disappointing NFP release, and a couple of dovish Fed comments later, has the market considering moving a little closer to further easing being implemented when “operation twist” runs out at the end of this month. The shift in CBank focus has postponed EUR’s fall from grace. China is also a part of this equation. 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.’

With the ECB firing blanks, Bernanke is now in the spotlight. The belief that QE3 is potentially in the works will not favor the dollar. FX seems to have been left behind by the other asset classes in yesterday’s market moves. The well documented record EUR short bets require fresh injection of common currency selling to fulfill current investor’s objective. Without it, speculators are beginning to question the risk reward of holding these record EUR negative bets. Draghi’s adopted cautious tone yesterday was unable to break the EUR’s back and has allowed weak short positions to begin unwinding their negative bets on the common currency.

Is there momentum for more upward movement by the EUR? This single currency rally is vulnerable. Not just for concerns about the health of the euro-zone, but also for potential for disappointment amongst the many that believe that QE3 is the correct choice for what ails the US. 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. Higher highs and lows in the daily period set the bias to the upside, providing a better opportunity to reestablish that EUR negative bet. Bernanke’s speech will doubtlessly reflect weaker data, and anticipate him to keep “all options open.” Technically, expect EUR offers to appear ahead of 1.26 first time around, with tight s/l parked just behind and more located around 1.2630 where some eager dealers would not mind shorting it!

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Expect the EUR to Disappoint