EUR Short No Thrill

When sentiment has been so badly beaten up its easy to see why markets pounce on any potential shift in eurozone bailout script. Listening to the same record does not give us much inspiration. It seems that policy makers themselves believe that while there are many options on the table to help temper this eurozone crisis, the market is not at that specific stage at where policy makers are showing urgency. To the nervous investor, the euro nonchalant attitude is only making more individuals trigger happy. Capital markets seems to be approaching the fork in the road of this crisis. The perception of Euro muddling through is no longer possible given “a country specific approach to Spain will not remain effective unless authorities also deal with Italy.” Just look at the deposit and the capital flight from Italy. Next thing you know is that country too is blackballed from the funding markets or paying up for cash just like Spain. This is the euro periphery domino effect in motion.

Already this morning the EUR has received some temporary relief from ECB’s Nowotny comments that he could see grounds for giving the ESM a banking license. Such a move would give the fund more firepower to fight the debt crisis. However, it would only be a minor palliative rather than a longer lasting solution to the crisis. If this stop gap measured is pursued, analysts believe that its capable of extending the end game for Spain by about three to five weeks. Markets have been using this rhetoric as an excuse to pare some of their offside positions. The single currency is expected to stay under pressure because of the lack of conviction in euro-zone policy’s. The delay to the ESM and the lack of a swift response to Spanish funding needs is only highlighting further Euro policy makers shortcomings.

Fed officials, impatient with the US economy’s sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials rhetoric has been plain and clear, they find the current state of the economy unacceptable. The perception is that some officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own. So, the questions seems to be of how and when to move? They could take steps at next weeks meeting, however, the rational seems to be that they will wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act. The absence of a Fed decision next week will only help global risk appetite to deteriorate further.

The usual suspects have dominated fundamental goings on in the overnight session. Thus far, it’s having little risk market affect. China has answered some analysts calls for additional fiscal stimulus to support their economy by expanding the value added tax reform to ten other major cities between now and the year end. It will provide a net tax cut for specific provinces and modest fiscal support to the Chinese economy and some global relief the market hopes. The shoulders of Europe being Germany is not immune to weaker fundamental data. German business confidence fell for the third straight month this month (103.3), as both current (111.6) and expectation (95.6) assessments dropped. Obviously, this euro crisis continues to have a huge negative affect on the regions largest economy. Even the Netherlands, another euro stronghold could not escape weakened business confidence.

Even the UK is beginning to question the wisdom of the Chancellors austerity drive after UK economic output collapsed in Q2 (-0.7%) of this year. It is the biggest quarterly recorded drop in two years. This contraction is hot on the heels of a negative Q4 (0.4%) and Q1 (-0.3%). The British economy seems mired in recession on the eve of the 2012 Olympics. There is only so much blame the unusually bad weather can take. Q2 was the wettest quarter on record and was bound to have an impact on some sectors, not all.

July 25

According to the Institute for New Economic Thinking (INET) “Europe is sleepwalking towards a disaster of incalculable proportions.” The reality is that if Europe goes then globally we are all in the same boat for a while at least. The intraday charts seem to be convincing the techies that there is more scope for further weakness with many looking to reestablish new shorts on upticks, targeting the seven year trend-line of 1.1985. The 10 and 30-day is negatively aligned, reinforcing the overall bearish bias. However, this market is aggressively oversold and a pullback is technically and fundamentally warranted before the next downward kick. Will we get it? Not necessarily so, this market steadfastly remains in front of the technicals. OANDA’s fresh longs have been riding the latest positions down the last big figure. Prudently, and despite trading just above recent lows, they have managed to pare some of these losing positions, preferring again to wade to the sidelines.

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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