Finally some market movement, and it seems to have picked the obvious side. The EUR right hand squeeze is on and the question remains will dealers be able to defend the obvious option barrier levels? If they cannot, a plethora of stop losses will be exposed reducing the dollar indexâ€™s momentum even further. The markets first â€˜realâ€™ line of defense is around 1.2450. Despite the August doldrumâ€™s, the bullish mood in equities is now beginning to generate a risk-on feel in FX. CFTC data continues to reveal a large extent of EUR shorts, certainly positions that look vulnerable, in this liquidity deprived environment, to bullish implications of increased risk appetite and short term technical positions.
Todayâ€™s short term bullish break in EURâ€™s may be what is needed to spur the spec investor into long positions, or more likely to pare back some of those huge EUR short positions on the IMM. Most seasoned dealers will advice investors that the â€œmarket drifting and waiting for key events often run against core positioning amidst lower volumes.â€ What is the current market waiting for? Pre-Jackson hole, ECB and NFP, the big EUR short may prove vulnerable. Weak and tight stops may prove too attractive for dealers not to trigger. Sometimes this type of trading environment seems very logical while other times not one bit. Right now, being short the EUR or risk feels wrong.
The main event on todayâ€™s sparse Euro data calendar was the issuance of 12 and18-month bill sale by Spain. Many in the market expected the event to have very limited market resonance, given the short tenor of the offerings and recently well-behaved price action in peripheral sovereign markets. The results show that in sum, Spain managed to sell at the top of the +EUR3.5-4b range with decent bids (cover ratios) and at yields (+3.07% vs. +3.92 and +3.335% vs. +4.24%) that are substantially lower than at previous auctions. It seems that the ECB inspired boost to risk taking is beginning to work? Obviously, in the short term more emphasis rests on the Euro flash PMI releases on Thursday and on the Greeks, Prime Minister Samarasâ€™ meetings with European officials later this week.
What else is gaining traction in a trading environment already deprived of nearly everything else? The debate over providing Greece with concessions within the current aid program as opposed to another bailout. It first gathered momentum over the past weekend in the German press (Der Spiegel was busy on the weekend rumor front). It has been pointed out that while a third bailout is unpopular, â€œOther measures are being considered, including a reduction or complete elimination of the interest that Greece pays on its loans.â€ Grexit risk are never that far away and the various meetings this week (Juncker and Samaras tomorrow, Merkel and Holland Thursday, Merkel and Samaras Friday and Holland and Samaras Saturday) is expected to leave an impression that Euro policy makers are not that inflexible. Itâ€™s all about perception, the illusion that policy makers control their own domain instills market confidence. This is the same in dealer trading, creating an illusion and getting the investor to do what the dealer wants and not necessarily what the investor requires.
Fitch Rating Inc. are at it again, opening their mouths and wanting to be heard. They belong to an industry sector that has become too political in nature rather than just sticking to their core values. A â€˜valueâ€™ that is trying to garner support which has lost some of its credibility over the past few years. Earlier today they stated that the weakest Euro-zone member is likely to face rating downgrades by year-end if there were no progress made on finding a solution to the current Euro crisis. They pointed out that the â€œexpectations remain high that policy makers will find a solution to the debt crisis, but there remains the chance of disappointment.â€ Regarding Italy, the risks facing that economy are more political than economics and that there is â€œno need for further austerity measuresâ€ in that country. How the crisis evolves in Italy depends on what occurs in Spain!
The retail sector continues to add to their core short EUR positions that was first established last Friday. Investors are willing to sell rallies ahead of 1.2480 in anticipation of deeper losses in the coming sessions towards the consensus medium term objective of 1.2150. The bigger short positions remain comfortable as long as the market remains trading below 1.2516. However, trade momentum favors right hand side for the moment, so expect a few nervous shorts stops to be triggered every now and then.