EUR Short Covering Just Started?

The EUR 1.32 handle was to be in the distant past. One Euro summit later, in tandem with month-end requirements, and we have a trading environment wishing to finally throw some volume about and a ‘lost’ currency finding some of its mojo again. The dollar seems to have suffered the opposite fate over the last trading session, under-performing against its peers in response to the relatively constructive outcome from yesterday’s flash EU summit in Brussels (the sixteenth in two years). It seems to be in the post summit, with reluctance, that the bears have been covering some of their longer term short EUR positions. The explanation that the Greek situation may be getting better is an explanation to fit the price action or is it the US, IMF and the Euro-zone working to combine the ESM and EFSF into a superfund with +EUR1.5t the reason?

Investors have tentatively welcomed the EU leaders agreement on a higher fiscal pact to be signed off next month, and a bailout mechanism that will come into effect in July. However, a black cloud still exists over proceedings. Portugal’s 10-year government yield (+16.29%) remains elevated and there is still no agreement between Greece and the private sector. The market is again concerned that the Portuguese will require another Greek style bailout if their government is unable to access the capital markets for ‘route one’ funding requirement. The country’s yields have ballooned since credit rating agencies lowered their ratings to below sub-investment grade earlier this month. Just like the other members of the peripheries, investors remain skeptical that the PSI in the Euro-zone sovereignty will only be applied to Greece.

However, in this moment, the summit is being viewed as a success relative to modest expectations. Belief like this has eliminated some of the event risk for the Euro-system. The bears will argue that the various asset classes have priced in a successful outcome already given the rallies across the board over the past week. With the Greek PSI agreement remaining elusive, this again can create enough market anxiety, reminding us that yesterday’s EUR level lows are only but a few trades away. The uncertainty over the extent of actual participation in the debt swap has the market again wanting to fade rallies in the EUR, especially as we approach the employment reports. Fear that other Euro financing stress issues, coupled with the regions deteriorating growth dynamics, may again urge monetary authorities to apply further easing.

Besides Greece, the market is beginning to focus on US employment data later this week and on the dynamics of BoJ and SNB own unique currency situations. Both authorities are on the verge of intervention. The Fed’s decision to extend its contingent commitment to low rates into late 2014 reinforces the markets bullish view on the yen. The EUR/CHF itself is only a touch above the official floor as investors risk aversion appetite comes into question with so much Euro sovereign uncertainty. In the big picture, 1.3250 remains the key resistance zone, but sustaining a break into the 1.32 must first be cemented.

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