EUR: No Bounce, No Lift, Why Own?

This EUR move is consistent, persistent and now has those individuals who last week managed to get themselves long, second guessing. Investors remain nervous as last ditch Greek coalition talks over the weekend broke down. To some it’s rational, others irrational, however, whatever is said, in the big picture, investors are scurrying to the sidelines, selling riskier assets and beginning to hoard those record low yielding bonds and bunds.

Risk assets have gotten little support from China’s RRR cuts over the weekend. Instead, investors prefer to hone in on Greece’s inability to govern itself and to the poor showing by Merkel’s Christian Democratic party in regional elections yesterday. The electorate has clearly rejected her austerity policies, which raises doubts about her staying in power next year. The build in EUR pressure stems from the uncertainty over how much contagion Greece’s exit from the euro-zone would cause and how much damage it would do to the “cohesion of the euro system as a whole.” Various Central Bank comments that a Greek exit “can be managed and is not necessarily fatal or attractive” already indicates the risk of euro-zone fragmentation. This explicit rhetoric about a possible Greek withdrawal has investors fearful.

The PBoC lowered their RRR by-50bps to +20% over the weekend. This will allow authorities to release approximately +CNY500b of liquidity into the banking system and “help smooth liquidity imbalances.” Analysts are not ruling out any further cuts this year as China shift to supporting growth rather than boosting it. Guilty by association has the antipodean currencies currently struggling outright as weaker than expected Chinese data of late has added to this market unease.

The market will be watching any development at today’s Eurogroup meeting of euro-zone finance ministers. Public comments on Greece seem unlikely until they have formed a new government. However, France and Spain are expected to be on the agenda, as well as a broader economic outlook for the euro-zone. Analysts believe that any discussion of Spanish budget objectives will have the “risk markets reacting somewhat favorably to any indications of additional forbearance on budget targets.”  Spain is very much under the microscope. No one can pretend to know whether Spain is illiquid or insolvent without gauging the size of the “black hole” that is the country’s banking sector.

Euro data out this week will confirm the regions recessionary conditions of Q1. Growth is expected to contract significantly in Italy, Greece, and Portugal, and even Germany is likely to print small negative numbers. All of this should meet the markets criteria for a ‘technical recession.’ This will only reinforce investors expectations for ECB easing measures, which obviously will not be a EUR supporter. From a technical perspective, the 10 and 30-day moving averages are negatively aligned, reinforcing the overall bearishness of the market. Expect some analysts to shift three month EUR expectations further to the left. For the intraday investor will look to reestablish short EUR positions higher up and is eying 1.28 as the first support buying opportunity.

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