A EUR Head Fake?

The major CBank meetings come ‘fast and furious’ at investors next week. The market is trying hard to believe that policy makers are thinking about other innovative ways to spur their own domestic economies and how to spread some of that unused credit. Every Central bank is facing the same music, a global recovery that’s “sputtering even after they delivered trillions of new dollars of liquidity at near-zero interest rates.” They are having to consider fresh strategies to combat this unified slowdown. Investors this time around managed to buy the single currency on growing expectations that the Fed would resume buying bonds and that Europe’s bailout fund will receive expanded lending powers. In truth, many have gotten hurt on the short EUR trade, but certainly not enough to dispel their bearish views as no fundamental shift lies behind this latest market uptick.

Euro data this morning confirms that the breakdown of Euro M3 data still reveals that change in the total quantity of domestic currency in circulation and deposited in banks was down by the expected -0.2%. The LTRO programs have clearly not been effective in spurring increased Euro lending. LTRO’s were introduced to prevent a “sharper contraction in bank loan balance sheets.” Perhaps without the program the data may have been worse but from the ECB’s perspective the global worry is that policy makers actions are not having the intended effect. Already ECB’s Noyer has said as much as core countries are able to pass on the rate cuts while the peripheries continue to face increased borrowing costs. The ECB’s actions it seems is becoming “country specific and asymmetric.”

The market is trying to trade on the premise that the detrimental affect of poor data on risk appetite might be partially offset by expectations of additional FOMC stimulus next week. This right hand side EUR move got the send off from Wednesday’s weak German IFO release suggesting that risks are still lower. However, in the global big picture, the sovereign debt crisis looks far from being resolved, with many analysts upping their probability that Greece will be the first member to exit in the next 12 to 18-months to +90%. Their reasoning is based on their downbeat assessments that prolonged economic weakness and financial market strains in the periphery countries is in danger of wholly spilling over for a renewed recession for the euro region as a whole.

In the US, durable goods orders headline is the main piece of data out today stateside. Many are expecting a release that is likely to disappoint, perhaps a negative -1.0%, m/m print on both headline and the core. The Kansas City Fed manufacturing index will be the second regional survey data release of the week, and thus far, consensus is set for a flatish reading. For this weeks techie bulls perhaps the affect of poor data on risk appetite might be somewhat offset by expectations of additional stimulus. The optimist and the dreaded pessimist will make a tough going of it and certainly should be able to provide some key talking points. Euro data this morning is not providing the single currency a fighting chance. Italian retail sales fell for the third consecutive month in May (-0.2%) and this despite an increase in food sales. The Italian economy has contracted for a fourth straight month a fact that will surely be widely acknowledged when capital markets can take its focus off Spain and look further east.

The European emerging currencies seem to be leading the EUR’s way this morning, firming and in tune with the single unit as a gentle wave of optimism finally begin to seeps into the market after ECB’s Nowotny comments about the ESM and banking licenses. Draghi’s Euro irreversible comments are lending a technical supporting hand to this morning’s short squeeze. The intraday techies scope is for gains upward towards 1.2355 (July 19th high) as long as market can create a clean break above 1.2145 which is key to direction. Caution is must despite the record short positions as the 10 and 30DMA remain negatively aligned. A head fake at this stage will be costly!

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EUR Short No Thrill