Are EUR Shorts Waiting for Month End Dollar Demand?

Stateside investors will be trying to get back to some sense of normalcy today, but expect it to be a longer haul for Wall Street. It will come as no surprise to see many of the Big Apples traders sit out the remainder of the week amid the chaos of Hurricane Sandy and its aftermath. For the rest of us, two days of non-trading is an eternity. Markets now must reprice all assets and securities from Friday’s close, factoring in Sandy’s aftermath, corporate earnings, month-end portfolio re-balancing and next week’s US elections, among other issues.

Which direction these markets will go on the US open is so far edging towards slightly negative, but, expect month-end business to distort some the directional flow. Just like the dollar slipping on the European open this morning and printing above the psychological 1.3000 EUR level. It’s a “big” surprise; most analysts and their mothers have been touting all last week that month-end flows were supposed to be dollar positive. Euro equities have started out trading positive while peripheral bonds spreads are tightening to Bunds, implying that that some risk is being applied. However, the overall tone remains one of caution.

Euro-zone finance ministers are to discuss a two-year extension on deficit reduction targets for Greece today via phone. Prime Minister Samaras and his government continue to negotiate with Troika over reform measures and spending cuts. Both sides know they have to come to an agreement for obvious reasons. It’s vital for the country to receive the next tranche of financial aid soon or technically “go bust”. Today’s conference call is Greece’s account of current progress. No decisions are expected given the opposition from several Euro states to more financial help-again the markets will have to wait for a Troika report!

It’s not too much of a surprise to see that the SNB bought fewer EUR’s in Q3 to defend their psychological 1.20 EUR /CHF floor level. This past summers lack of volatility did not support the need to do so. The Central Bank held only +48% of its currency reserves in EUR’s, down significantly from +60% in the June print. In stark contrast, it’s dollar reserves climbed to +28% of total holdings from +22% q/q. The SNB’s holding of the remaining majors, JPY, GBP and CAD rose slightly to +9%, +7% and +4% respectively.

The ECB’s emergency borrowing facility numbers this morning rose for the first time in five trading days. Euro financial institutions borrowed +EUR660m yesterday from Monday’s +EUR251m (lowest volume of O/N loans in six-months). Deposits on the other hand increased ever so slightly d/d to +EUR274.05m. When the ECB flooded the market with cheap three-year loans last year, deposits ballooned. When Central Bankers cut the deposit rate to zero% in July deposits naturally fell sharply as Banks transferred their funds into the more flexible “current account.”

In the US, the October data cycle heats up with the release of the Chicago PMI today, ahead of the national ISM tomorrow. The market is looking for the headline to recover from last month’s print below 50, and into contraction territory for the first time in three-years. A 51 print reinforces the theme of steady growth at subdued levels; should support risk.

Yesterday, EUR shorts dominated positioning. Option strikes, thin liquidity and short squeezing certainly have not helped all offside positions. Relying on the supposed month end USD demand has been rather costly for those remaining EUR shorts. With markets about to open in the US after a forced two-day closure has many stepping to the sidelines. The thinking now for the EUR, is that with current momentum, the overall scope is for gains towards the 30-day upper Bollinger band in the coming sessions (1.3080-90). Ideally, investors would prefer to be buying EUR’s on dips. If the rumor was true and month end USD buying exists then ideally 1.2950 and 1.29 would be EUR buyer’s first port-of-call.