EURs Litany of Reasons to Short

This is a week of crowded policy events and euro area sovereign issues. Currently, investors are witnessing a mild risk rally, with the dollar giving back some of Friday’s gains, especially against the commodity currencies. With such negative overall market sentiment, this positive EUR move is expected to experience limited gains as investors will us the opportunity to reestablish further record short EUR positions.

Merkel and Sarkozy rendezvous in Berlin this morning, another follow up on the early December ‘powwow.’ The talks are expected to center on amendments of the new treaty for a fiscal compact negotiated pre-holidays. No one anticipates anything innovative to come of the meet, especially anything that might upstage the EU leaders’ summit at the end of this month.

The EUR is supposed to come under renewed pressure from various directions this week. The uncertain prospects for a hefty slate of euro zone debt sales (especially Italian and Spanish by week’s end) will be keeping dealers busy. Euro-zone data this morning is providing some relief, but the regions “deep-seated problems” are anticipated to keep a lid on regional bourses. Italian 10-year paper continues to yield above +7%, while its equivalent Spanish 10-year product trades just under +6%, both unsustainable yields for a “depressed region.” On a more positive note, German data has given the market a temporary boost, trying to mitigate some of the euro debt tensions. The country’s exports jumped +2.5% in November, unexpectedly widening the trade surplus (+EUR15.1b) in a sign Europe’s largest economy is still “outpacing peers.”

There are a litany of weekend headline reasons providing support for currency speculators who boosted their short positions in the EUR to record levels as data from the CFTC showed on Friday.

• IMF is losing confidence in Greece’s ability to reform
• China to lower 2012 growth targets to +7%
• Merkel’s coalition party contradicts her on Euro unity
• Finance Minister Schaeuble adviser say’s Greece needs a bigger haircut
• Spain’s fiscal slippage is credit negative
• AUD retail sales for November was flat

This is only the weekend list! Merkel and Sarkozy are not the only show in town. With most of the market digesting the weaker than expected German industrialized data (-0.6% vs. -0.4%), few investors will be looking ahead to Thursday’s ECB rate announcement and any changes with the private sector holders of Greek debt. Everyone seems to want to see the “green light” for shorting again!