Retail to recycle their EURs?

This morning’s EUR price graph would be a whole lot different were it not helped by an unexpected boost from better than expected German and French consumer confidence data. Instead of toying with a new record low, the EUR again is currently eying the 1.26 handle. The recent discriminating selling of global equities and buying of safe haven bonds has come to a temporary halt, and that even includes in the periphery zone. All regional markets seem to be witnessing a confidence upsurge, albeit temporary or not. This could be described as a sign of a jaded market, occupied with weary investors who warrant a short breather to compose themselves. This week has seen an overkill from the fundamental side and a rather indecisive EU summit meet. When combined these have managed to set the selling of the single unit into overdrive.

For many, the possibility of further ECB easing has had a stranglehold on the currency, resulting in this recent slide. This is not necessarily true. An ECB easing has not been fixed and has not been fully priced in by fixed income dealers. Why? A percentage of the market seem to have come to the realization that an ECB rate cut may not be the best way to achieve anything. This does not rule out further easing, it’s because policy makers understand the marginal affect an ease would have on growth, believing it to be limiting at best. In honesty, a rate cut would probably hurt the currency further by narrowing the EUR’s yield premium over that of the ‘big’ dollar. The current woes of the EUR lie squarely on the possibility of a Greek exit. Obviously, a response to that physically occurring would have to be a monetary ease. However, a rate cut early next month would probably add to the EUR headwinds without “alleviating investor concerns about the integrity of EZ.”

The somewhat upbeat mood this morning has been driven by German data showing consumer confidence index defiantly steady this month at 5.7, with the overall indicator forecasting an identical reading for June. It seems that German households are openly portraying a bout of resilience of confidence, despite the recent financial market turmoil and the whispers of an exit strategy date for Greece. Even the French have bought into this upbeat mood. Their consumer confidence print has risen 1 point to 90 this am. It seems that no one from the core has managed to or is willing to hit the panic button just yet, believing that a coalition government will eventually be elected, which will successfully renegotiate some aspect of the bailout. It is the investor ‘from away’ who is probably carrying most of the break up position.

It has been a long week of contagion and toxic Spanish banking system talk, a week where many analyst firms are trying to pinpoint the exact timing of a Greek exit. However, not a week wholly content on giving up on the single unit just yet. Mind you, there are periods that the currency trades without investor support, but that has been rare thus far. The EUR, for now, has been banging up against its 52-week low. The large retail sector has been merrily accumulating long positions south of 1.26 for most of this week. They seem happy in EUR ownership, however, their upside objectives are limited. With the EUR extending its intraday recovery towards and into a 1.26 handle will be eying stops placed just above the figure. Should the single unit manage to eke out more gains, option expires strategically placed at 1.2630/40 should encourage fresh selling.

Despite some decent offers on hand north of 1.26 to slow this morning’s bounce, long term downside risks remain, albeit somewhat tempered by a long weekend squaring. The market seems somewhat confident that the larger stops will be ignored at 1.27, but we all should remember last weekends intraday event risk squaring. Just like the selling pressure, buying was overbought come Sunday night. Overall, market short is the dominant play with intraday long-weekend pricing a potential danger. Let the retailers recycle their EUR’s. It will just give others a reason to improve on their overall short average!

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Do EUR Shorts Feel Comfortable?