Beginning of the dollar pain trade?

The USD is opening this weeks account a good deal weaker. Asian and Euro-bourses have rebounded from their biggest selloff in nearly two-months amid speculation policy makers are intensifying their efforts to contain “the” debt crisis.

For most of the weekend throughout Europe, the free press was reporting positive EUR actions. Yesterday, Germany’s finance minister suggested that the Euro-zone could rapidly implement changes to the Lisbon Treaty, allowing for significantly greater EC fiscal oversight of Euro area member countries. In theory, this would create a “Stability Union” before a deeper treaty change in the future. Elsewhere, in Italy, La Stampa, suggested that that the IMF would provide a €600b financing facility for Italy (this could only ever be EUR positive). Other news sources have since cited unnamed officials as saying that the report is not credible and that there are no discussions within the G7 of a large IMF package for Italy. However, that being said the story has nonetheless alerted the market to the possibility that some assistance might come from the IMF’s mission to Rome this week and the Eurogroup meeting.

The German newspapers have not been left out in the cold. They reported that the German government and five other EZ members, with triple “A” credit ratings, are considering issuing bonds. Part of the money raised would be used to provide financial assistance, under strict conditions, for Italy and Spain. Finally, the EFSF issued a new issuance strategy that would have it increase precautionary funding. The above reasons, remedies and excuses, have allowed the market to apply risk again, despite another rating agency, Moody’s warning that Euro area sovereign ratings are increasingly under threat. They noted that risk of multiple defaults by Euro area countries is “no longer negligible”.

There has been interest to sell EUR’s into this relief rally thus far, however, stop losses still lurk tight above 1.34+ that could fuel further short term gains. Bigger picture, confidence in the debt-embattled single currency remains “paper thin’ and many in Europe will already be eyeing tomorrows EUR+8b BTP (Italian) auction for euro-demand clues. The future of the Euro-zone remains hanging in the balance. The market cannot be fooled by month-end window dressing affecting the FX market over the remaining few session for November. The right-hand-side remains most vulnerable to the pain trade.

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Week in FX: Europe Nov. 20-25

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