Have We Missed the EUR Sweet Spot after Italian Auction?

All dealers can talk about is the limited upside of the single currency and that the risk reward favors shorting the EUR. Analysts have been revising their first quarter and year end projections down to an average of 1.22 and 1.15. Despite the surprisingly positive sovereign periphery bill and bond issues this week, the prospect of additional ECB easing suggests that interest rate support for the EUR is likely to wane further over the coming week or months. The relative strength of the US economy compared to the Euro and UK means that the pound and EUR should record further upsets to the USD.

This mornings Italian bond auction has given the market more of an excuse to fade the single currency rallies. “Buy the rumor and sell the fact” played out very nicely. The market seems to have taken yesterdays stronger periphery auction results as an opportunity to own some ‘expensive’ EURs and even sell them at a profit and then some, proven by the price action over the last 24-hours. One gets the feeling that the market is again happily short at better levels. The solid prior sale of Italian bonds has only upped the ante and the results have only served as a trigger to short the EUR. Further tests of the 1.27 handle are eyed with fresh offers reappearing at the old option strikes of 1.285. The longer term support remains close to the option barriers of 1.265.

Italy managed to sell a total of +EUR4.75b 2014/2018 BTP (the top end of their range). The yields at the auction came in lower than the secondary market levels, some traders were disappointed with the bid-to-cover ratio; the FI market seems happy selling Italy and buying German Bunds as the spread looks attractive.

Even surprisingly strong EUR data is ignored by market players. The Euro-zone this morning posted an unexpected trade surplus surprise. The market had been forecasting a deficit of-EUR1b, however, the region registered a surplus of +EUR1b. A surge in exports helped the Euro-zone post this major surplus. Can the region avoid a severe economic downturn? The Euro tends to post trade deficits in the winter months due to the high fuel and energy inputs. However, the seasonally adjusted figures show that the inputs were the same month-over-month while exports surged +3.9%!

Now we have to wait and see if North America wants to cash in some EUR profit this morning, no matter what, offers are again appearing as the market seems to have more conviction about medium term direction. Before this weeks auctions, the bulk of investors have been happily waiting on the side lines.

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Will the US embrace the EURs new found confidence?

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