Another Intraday EUR Squeeze?

In the past 24-hours, the market has seen an aggressive EUR reversal higher from support found at 1.2975. The move is allowing analysts to take dead aim on a stronger rebound, back above the 1.32 handle that we had briefly occupied earlier in the week. The change in sentiment comes from the bit of relief on the European front allowing the market to focus on fundamentals, specifically US data that seems to be improving day-over-day. Another round of strong US releases yesterday is attempting to boost risk sentiment and punishing the greenback. However, it would be very non-European not to believe that another nervous weekend lies ahead despite the intraday turnaround.

The aggressive squeeze put on the weaker EUR shorts was caused by the Greek government believing that a deal is done. This occurred after German sources yesterday indicated that a plan to delay the overall deal to Greece by providing a bridging loan to pay next months bond redemption had been dropped, thus paving the way for the country to get a second +EUR130b bailout after next Monday’s Euro finance ministers meeting.

Aiding risk sentiment is the news that the ECB plans to swap its Greek debt holdings for new bonds once debt restructuring negotiations are complete. The central bank is expected to be exempt from the so-called ‘collective action clause.’ An exemption means the ECB would not have to participate if the Greek government imposes involuntary losses on bondholders from its PSI program.

Allowing the ECB not to incur losses means they could distribute the profits from the holdings to the second Greek aid package. Swapping into new bonds would make it easier to impose losses on other remaining holders. Obviously, there are cries of preferential treatment. An exemption could be creating a two-tier system, which would discourage investment in other peripheral debt markets. In theory, this will eventually weaken the EUR. However, its not an issue for today. Allow the leaders to ink a deal first before we make that connection.

Stronger US data yesterday is expected to put the final squeeze on the weaker shorts this morning, as there is little else on the radar to do so. Initial jobless claims last week beat expectations, falling to the lowest level in four years, meanwhile Philly Fed for this month came in stronger than expected, as did January housing starts. However, being M.I.A is the safest way in these headlined fueled moves.

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