EUR Jitters Shorts to Reload

The market is finding it difficult in knowing which way to look. The current price action is filling in some of those gaps created by the initial French and Greek election results. The new French President, Hollande was not ‘the’ surprise. Capital markets were already working on his winning spread. Again it was Greece, the thorn of Europe. The electorate there have managed to strip the ruling coalition of its majority, igniting concern that the region is losing its appetite for austerity. The markets will be looking towards the Franco/German axis for guidance. Hollande, the socialist declaring “austerity can no longer be the only solution,” will be required to look beyond France when he meets with Merkel later this week, to save the EUR.

Initial market reaction saw the EUR plummet through the key support level of 1.3, while yields rose on sovereign bonds issued by Greece, France, Italy and Spain. European equities have opened sharply lower. The election outcome in Greece creates significant uncertainty for the country and for the “broader spectrum of euro-dominated assets.” The Greeks have a tight timeline, an internal political deal must be struck quickly as a new budget plan needs to be in place by June to secure more economic aid. Greek politics is not unfamiliar to a Euro-deadline, they have run most Euro administrations to the brink on several occasions. The rest of the world can expect to witness further discord amongst the Greek population as they most likely will take to the streets expressing their displeasure before an end.

So far, political leaders have been ousted in Italy, Spain and the Netherlands as the debt crisis spreads and underscores the growing public anger at the austerity measures that Euro-policymakers believe are essential to resolving the regions fiscal crisis. With Euro unemployment at record highs, it is easier for the populous to become weary of austerity measures. Both technically and fundamentally, the Greek result is another recipe for regional chaos. The markets will wait to see how the ‘core’ reacts before tipping their hand. Again the market is having to think about pricing in a Euro exit risk. Until now, policy makers have wanted Greece to remain in the common currency as they fear that any bank run could spread to other troubling periphery economies like Spain and Italy. Where is “that” firewall that Europe has been creating?

Technically, the daily momentum remains bearish after the EUR collapsed O/N, leaving a gap topside between 1.3063-83 before printing 1.2955 on the downside. The extended left hand side run was fueled by stops below the key support of 1.3. So far this morning, cooler heads have retraced some of that loss, trading again above 1.30 in an illiquid, London absent market. Despite the market being overall short, those weak triggered stop losses below the figure will be expected to want to reestablish a new short EUR position. Currently, the risk reward is not to hold long EUR positions in such a negative tone environment. Expect North America initially to side with the bears, eyeing the 1.2950 barrier below.