EUR Song Remains the Same

The market at best was looking to a quiet start to the week and not for the systematic EUR leaking already underway this morning. The single currency was given a lofty leg up on Friday the thirteen as the dollar retreated from a two-year high on fear that it had been overbought. Rumors of further weekend Chinese stimulus coupled with a market technically oversold and a week ending with an equity rally supported by JP Morgan and a Goldman revised one year EUR target (1.40) managed to squeeze further life out of the record EUR shorts. The lofty heights achieved in the overnight session have not been sustainable. Trade risk has allowed most rallies to be comfortably sold to price levels reminiscent of last weeks open.

Aiding the EUR on its downward spiral this morning have been the negative return of Euro periphery bonds and the potential German constitutional decision. Spanish and Italian bonds spreads continue to widen overall to Bunds. Light selling is been recorded on the street, with the primary motivation for price action being a reaction to reports that the ECB is potentially taking a more liberal attitude to allowing loss for senior debt. Losses on Spanish assets are frowned upon as it remains difficult to break the ‘sovereign and bank link.’ The market can also expect the pending Spanish 2’s, 5’s and 7’s supply slated for this Thursday to act as the outlier weighing on its curve or at least an excuse until risk aversion momentum selling builds up.

The Germany’s constitutional court is now expected to rule on the ESM and the associated Fiscal Compact on September 12, wrapping overall rulings on these subjects alongside that of whether to grant an injunction allowing implementation of the ESM. A ruling on the injunction had been expected sooner, if not by about now. As such, it can be seen as at least a temporary setback for the ESM, though expectations are still that it will ultimately pass the courts for actual implementation. In the interim, EFSF funding is already and will still be available as and when needed.

It’s a quiet week in Europe, with limited data releases and no policy deadlines. On the data front, the market will want to be focusing on the German ZEW survey tomorrow, for which analysts are expecting a small deterioration. The highlight this week will obviously be the market monitoring of Fed Bernanke’s semiannual Monetary Policy Report to Congress on Tuesday and Wednesday for any strong indication of an imminent shift in favor of another round of AP. Is helicopter Ben expected to stall for more time? The cautious approach towards further easing suggests that expectations of an overly dovish testimony will be market disappointing for risk appetite. Ben appearing noncommittal, but perhaps acknowledging the US economy slowdown and set the stage for a September decision can only be a further dollar bull sign.

EUR/JPY selling tied to large Eurozone bond-redemption is carry the risk-off mood selling this morning, allowing the signal currency to trigger outright long stop losses sub-1.22. Even though the currency is trading north of Friday’s lows, outright short positions are favored now that the overnight highs have been negatively rejected. The bias remains with the bears and fading single currency rallies seems to be the order of the day. The tech charts continue to show that prices are willing to ease again in line with the hourly studies. The short term target remains the up trend line of 2005 which comes in sub-1.20. OANDA’s retail positions are little changed. They have been buying EUR’s, going long and refuse to pare positions on this dip. Are they an indicator of what not to do? Further EUR weakness is expected as option expiry pressure left hand side continues to build up. Will Ben toe the line and not upset any apple cart until after election?

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Focus shift from FED to PBOC