EURs to be Recycled

The third largest IPO in corporate history, the largest in tech, is about to make a few specs very wealthy today. Frantic Facebook Friday’s enthusiasm does not seem to be spilling over to disrupt the dour mood of FX. The 50% of Americans who believe that Facebook is a fad, will not be allowed to gatecrash today’s party. The EUR bull thought they caught a break with yesterday’s dismal US data potentially opening the Q3 flood gates. That euphoric feeling has been short lived, flames finally doused by rabid credit agency action in the overnight session. Currently, there is no noticeable peripheral spread narrowing to support this equity led risk rally.

Moody’s has been kept busy in the overnight session, downgrading 16 Spanish banks by one to three notches, with ten of the institutions left on negative outlook. Without going into too much detail, the downgrades reflect each bank’s operating conditions, rapid asset quality deterioration (long too many holiday homes on their books), funding concerns and finally, each entities creditworthiness of the Spanish sovereign. This final point is probably the most significant, analysts note that it affects the ability of the government to support banks. Moody’s is currently Euro country hopping, and this will not be the last of the European banks to be downgraded in this cycle.They have eleven more EU member announcements to handle before the end of next month. Not to be left in the cold, Fitch cut Greek long-term sovereign rating to CCC from B-, bringing its rating in line with S&P’s.

The Greek radicals under Tsipras believe they still have the hammer over the rest of the Europe, presuming that fellow members will not roll the dice and cut off funding to his country. His party believes a financial collapse in Greece would drag his compatriots down as well. Obviously quoting Hollande visions, Europe must consider more growth oriented policies for his homeland. Coming back to the EUR reality, there is no alternative for Greece, she must stick to the deal that has been agreed. Other Euro policy makers concur that this is the country’s only rational option. It’s no wonder that contingency plans are being drawn up in case Greece were to exit the Euro-zone. Their woes reinforce the dollar bull views that the single currency will struggle to make it back above 1.30 even if the polls start to signal a greater chance of a pro-EMU composition of the Greek parliament. Any Greek coalitions will still have to face a difficult negotiation on a modified austerity plan. The thought of an ECB easing, to promote growth, does not strengthen the currency either!

may 18 pos

The position ratios continue to show that the market has been quietly gathering EUR’s ahead of this years low print of 1.2624. The EUR bears are happy to pare some of their ‘one directional’ trade positions to at least recycle said funds. There are a few significant strikes occurring today. The larger sizes will only increase short term spot gravitation of certain levels (specifically, 1.27 and 1.2725). Single currency supply is expected to be on hand as the market approaches 1.2750. The longer term focus still remains fixated on breaching the psychological 1.26 barrier below. It will not be unusual for the markets to see the EUR rally intraday, cutting some of the record short positions ahead of this weekends G8 meetings. It’s always prudent to play the percentages in case of event risk. Obviously counteracting this will be the possibility of fresh Euro negative news occurring during the weekend from any embattled member. The trend remains your friend and having cash to recycle also feels good!

Forex heatmap

Other Links:
EUR Short Squeeze Too Far?

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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