It about polls and positioning that has created this EUR weak bid during this illiquid holiday Monday. Constructive opinion polls from Ireland and Greece has sparked a relief rally in risk in the overnight session. A number of fresh Greek polls show the â€˜New Democracyâ€™ in the lead with margins ranging from +0.5% to almost +6%. This Thursday, the Irish electorate head to vote in a referendum on whether the government can ratify the EU fiscal compact. Recent polls suggest that a yes is a win, however, there is a relatively large number of undecided voters. If the electorate make this a personal issue and an attack on the Irish governmentâ€™s handling of the current crisis, then a â€˜yesâ€™ could be a tougher pill to swallow. Analysts note that a “no” vote would not block the treaty from going into effect outside of Ireland but would bar Irish access to the ESM, opening a new source of stress on the European front
EUR risk gains have been fragile as Spanish bond yields edge higher amid growing concerns of the Spanish banking system. Itâ€™s believed that the Spanish government is to pour a whopping +EUR19b into their third largest bank, nationalizing the institution. There are other reports that the Spanish government would also need to tap into the EFSF to help their banking sector to the tune of +EUR30b to clean up and recapitalize three other banks. This is not an amount to sneeze at and surely not an isolated situation as its difficult to believe in the â€˜one cockroach theory.â€™
This week will again be dominated by news and speculation regarding the chances of a Greek exit and its potential repercussions. If the Greek vote goes the right way, the best case scenario for the EU would still entail weak growth, austerity and structural reforms. Even with this weekends positive poll results, the market is betting heavily on an exit. Despite the immediate effect of an exit, to shut that exit door firmly after them requires significant steps towards fiscal and political unity, the very core problem of the EUR. Either scenario does not pose an easy route for the single currency in the short term.
From a positional point of view, this market is record short EURâ€™s. Most individual models are starting to indicate that the currency is â€˜undervaluedâ€™ from a fair value standpoint. This one directional trade has witnessed a slow five-cent grind lower over the past ten-trading sessions, with very little profit taking being booked. In the absence of major EUR data and news this week, there is a potential that the currency, for positional reasons, could gather some momentum. Currently, the market does not believe in a short squeeze, this is a major faux pas. The record short speculative positions have existed for over six-months and many investors would require more than a few Greek opinion polls to help improve the overall situation. Regional debt sustainability remains the big issue, just look at bond yields!
Since mid last week the retail sector has been getting themselves long the single unit just ahead of this years lows. Holiday Mondays tend to trade slow and expensively as liquidity become a premium. Despite the market maintaining an over all short play, attractive stops appear north of 1.2640+. It days like this that justify a market having legs to fill in that gap to 1.27 before testing lower outright again. Look for many tight stops to be tripped before reselling starts again!
Dollar to Dominate until Greece a done Deal