EUR Top is Where Now?

The market sure did not see this one coming from the Fed. An “unambiguous and aggressive” statement from US policy makers is certainly laying the groundworks for QE3. With unemployment elevated and inflation subdued, Helicopter Ben can certainly put this option back on the table. The Fed has set a long term inflation target of +2%, a level they expect to fall short of this year and next. Despite the US economy appearing to be picking up steam in manufacturing, housing and employment, the goto excuse for Central Bankers, Europe and its debt laden outliers, is allowing the Fed to prepare for a third round of large-scale asset purchases.

The Fed’s extended commitment to low dollar funding costs is broadly bearish for the USD and bullish for higher-yielding G10 and EM currencies. The risk addicts are getting what they want. CAD at parity, AUD at new yearly highs, Kiwi, Mexico and other growth currencies following suite. The dollars demise has “emerging” Cbankers intervening to stem the speed of domestic appreciation and other G10 just worried for now about their appreciation. The Fixed Income dealers are taking the middle of the US yield curve sharply lower as pricing for policy tightening gets pushed back further into the future.

With the market lapping up this risk, it is intensifying the EUR bear squeeze. For now, the short positions have some of the crosses working in their favor. USD/CHF sales continue to weigh on the cross, with EUR/CHF being sold to session lows in Europe. There has been rumors of SNB interest in the mid 1.20’s over the last couple of sessions as the cross gravitates towards that Central Bank floor barrier.

An 18-month ‘exceptionally’ low yield extension will obviously take some time to price in, a job certainly not made any easier by EUR record shorts, weak shorts and a plethora of new hopeful position taking, the type who are trying to find the ideal speculative EUR top ahead of the record periphery debt issues this quarter. At such lofty heights, how much more to the top if private lenders accept a lower Greek coupon deal?

US firmer data bodes well for risk. Analysts expect a strong headline print from US durable goods this morning (+2.5%, m/m on the headline), new home sales to have reached a new yearly high and jobless claims to have risen in line with consensus. No one can argue that a dovish Fed, coupled with strong data will help risk and trigger more weak EUR stops and option barriers. Wait until the world stops spinning and pick your levels!

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