Has the EUR the Strength to Rally with Conviction?

Hands up anyone who was not disappointed with the EU summit outcome? Again the meetings have failed to produce any meaningful developments. Efforts to push for a banking union ran into resistance from the usual set of suspects, led not surprisingly, by Germany. There was no official request for aid made by the Spanish government either, this certainly peeved a few investors who ended up liquidating some of their EUR held positions after digesting some disappointing US corporate earnings last week. The market still expects Spain to go cap in hand to its fellow members, but uncertainty still remains on the timing.

Investors are looking for reasons for the current risk-positive environment to hold. There are a few, but again the periphery problem countries remain the most dominant variables to break the risk investor’s attitude. The Spanish Prime Minister Rajoy received somewhat of a boost over the weekend. Exit polls showed that his Conservative party won an election in Galicia, certainly supportive for his austerity programs, although they lost the election in the Basque region, a separatist dominant region. There is still no news on when Greece might officially get the second tranche of +EUR31.5B. On Friday they insisted now and in full, no installments or exit was implied. Perhaps next months Euro-group meeting we may get an announcement?

There is no data of note due on either side of the Atlantic pond today, again forcing FX traders to continue eyeing the US corporate results and equity markets for partial direction. This week focus will be on central bank policy announcements from the Fed, Bank of Canada (BoC) and the Reserve Bank of New Zealand (RBNZ). Investors will look to the flash PMI releases midweek for manufacturing trends and to the Q3 UK and US GDP releases for guidance on growth prospects.
Analysts are expecting that this weeks releases could imply that the worst of the Q3 slowdown scare is behind us.

The market should see a modest rebound in the US September durable goods report, aided by a recovery in aircraft orders headline, the variable that gave us a weak August print. ISM new order components, flash PMI estimates and Fed manufacturing surveys look to get the thumbs up from most analysts. Finishing the week with USD Q3 GDP topping Q2 estimates. In this scenario, the data set should be supportive for the Americas and could possibly halt the single units rise of late.

Merkel is looking for a new opponent it seems. Perception is everything and she does have a general election to contest next year you know! It’s rumored that Germany is planning to warn Britain that it will seek to cancel next month’s European budget summit if Mr. Cameron insists that he will veto any deal other than a total freeze on spending. The Chancellor wants Great Britain to back a German compromise that would cap EU spending at +1% of European GDP. Merkel needs to improve her domestic popularity and win votes. Many of her actions from here on in will be questioned. For a long time she has put Europe first, now she has to juggle her priorities and agendas to win over domestic votes. Expect all her actions to be questioned.

So far the FX spot market has generally traded sideways with very little volume. In the futures market, short covering of the EUR continues to dominate position adjustment, producing the smallest gross short in 12-months. IMM speculative positioning still shows a large number of short EUR positions remain. In this current environment, one questions if the currency has the stamina or legs to initiate any further short covering? Overall, the EUR has yet to prove itself. After the initial adjustment to reduced tail risk in Europe, the single unit has been trading in a $1.2800-$1.3200 range.

The Cash and techies are long the EUR, long close to the figure. They are looking to target last year’s trend line, a price of 1.3135’ish. Currently the market price is rallying away from last Friday’s low of 1.3014 after finding support ahead of the 10-DMA. However, the day charts remain bearish and market conviction is questionable. Options and their strike prices will influence current price action. The longer we do not rally with conviction, the better chance that the single unit is seen wanting to take a step back.

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