In capital markets big picture, downside risk for the EUR continues to build. All the market has to do is focus on sovereign distress and banking fragilities. However, despite the single currency currently being the weakest link in the FX chain, record shorts remain weary of current price levels. The overall market feeling is that Draghi is more rational than most Eurocrats tend to be and we should expect those characteristics to be more likely be bearish than bullish for an economic outlook for Europe. That said, the upcoming ruling from Germanyâ€™s constitutional court on the constitutionality of the European bailout fund has overshadowed most of his comments yesterday.
Todayâ€™s German court sitting is not expected it to yield a decision, thatâ€™s expected in the second half of this month. If ruled constitutional, the single currency should be able to rally a few cents. However, these rallies can be expected to be restricted on the belief that the euro bailout fund is not adequately funded to deal with all the euro problems. Granting a temporary injunction against the ESM and the fiscal pact on grounds that it transfers â€œan unconstitutional amount of power to European institutionsâ€ would be negative for risk taking, raising uncertainty and should underpin the EUR again.
Without either monetary or political development that can meaningfully compress sovereign spreads the odds are tipped for the EUR to test sub 1.21 sooner than we think. Peripheral markets this morning are tighter in what optically looks like short covering. â€˜Real moneyâ€™ is reported to be buying the belly of the Spanish and Italian yield curve. Is it sustainable? A stuttering China and ongoing euro-zone concerns continue to keep investors at bay. The lack of urgency again shown by Euro-zone ministers to right the ship is more market negative than positive. The directional uncertainty is forcing more investors to the sidelines. Because these investors are record short EURâ€™s, paring positions currently requires bidding up the single unit and potentially squeezing out some much weaker short positions along the way.
Investors already felt underwhelmed by yesterdayâ€™s Eurogroup meeting, today they can add China to the list. Euro finance ministers have agreed on the aid package for Spanish banks and have decided to give the country an extra year to meet its deficit targets, but questions remain about secondary market intervention. This coupled with more bad news from China is keeping investors mostly on edge. Their June trade surplus came in higher than expected, at $31.7b, but this was primarily due to weak import growth. Is domestic demand slowing? The release comes a day after inflation eased and does not provide a positive setting for the end of the weekâ€™s domestic Chinese growth numbers.
24-hours later and we are still discussing the same EUR price levels. Attempts to lift off the overnight lows have been capped just above 1.2330 this morning. 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. Technically this bear trend remains intact unless we manage to penetrate last Fridays high above 1.24. The dailyâ€™s are oversold and is providing some of this uptick fodder. The OANDAâ€™s retail positions are little changed. They have been buying EURâ€™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. Single currency rallies are comfortably sold for now at least.
EURO is Comfortably Sold?