Weak EUR Stops Where?

This EUR negativity is relentless. The existence of the single unit, is being broken down one big figure at a time. This currency is no longer immune to the sovereign debt problem as it has been for the past 24-months. The single unit’s value is within touching distance to where it stood in May 2010 (1.2300), when Europe’s sovereign debt crisis was just getting into full swing. Even with this plethora of Euro bad news since then, the currency trades higher. However, this time around we utter the words, “EUR existence?” far greater.

The pressure that has been exerted on the currency over the past five days has come about partly because emerging country central bank buying for reserve diversification seems to have slowed. This market is record short according to most models. The retail sector has been perhaps the only buyer of late. Up to now, they have been happy acquiring EUR’s ahead of last weeks two-year support level. Now its down to what their risk tolerance is like for their next move. They have been the EUR’s only big supporter. Not helping their positioning is the pace of money leaving the Euro-zone. Investment corporate and retail equity flight is said to have picked up.

All eyes are on Spain. It is presently the centre of interest in the world economy. Investors are worried that the cash strapped nation cannot finance the clean up of its financial system. The EUR straddles a new two-year low on the back of reports indicating that the ECB has rejected the Spanish government’s bank recapitalization plans. Apparently, Euro policy makers were to have dismissed Madrid’s plan to aid a top tier bank by injecting +EUR19b of sovereign bonds directly into the parent company, which could then be swapped for cash at the ECB. According to the Central Bankers, such a plan would be in danger of breaching an EU ban on monetary financing, a proper capital injection was needed. However, according to most scripts, the ECB denies being consulted on any such plans, but they are ready to advise on development of “such” plans.

With Chinese stimulus excitement waning and EUR confidence being severely tested has risk positioning again under pressure. Hopes for a strong Chinese stimulus package, which was partly responsible for the recent rally in Asian equities, has moderated. Investors now believe that the Chinese government will not launch anything on the same scale as 2008. This morning Euro economic sentiment indicator for the region beat even the direst of predictions. The indicator fell to 90.6 from 92.9, exceeding the modest guesstimate of 92. The weakening of business confidence indicates that investments and new hiring looks unlikely to be picking up in the coming months. This does nothing for a sustained euro recovery!

These are good enough reasons to extend the heavily favoured negative bet against the EUR. However, how much more of a squeeze can the market get out of this record short bet? Over the past five sessions, the retail sector has taken back most of its profit, while adding to some of their longs. The last 24-hour move has certainly gone against them. The market will now be anticipating their risk tolerance and wonder if its worth triggering the weak long stops just ahead of 1.24. This recent breakdown has been agonizingly slow, with very little kick back. Expect some short positions to be pared ahead of the Irish Referendum and NFP this Friday!

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EUR Lacks Follow Through?