Euro Wrong Foots Shorts - 1.3000 Once More?

Last updated 7/19/2010 4:25 AM ET (GMT -5) 2 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Hungary fails to reach accord with IMF
• Ireland downgraded but euro resilient as it retakes 1.2900
• Asia down except for China Europe flat
• Oil slips to $76.00
• Gold at $1190/oz. last

Overnight Eco

• GBP Rightmove HPI m/m -0.6% vs .0.3%
• EUR Current Account -5.8B vs. -3.0B

Event Risk on Tap

• CAD Foreign Securities Purchases
• USD NAHB Housing Market Index expected at 16

Price Action

• USD/JPY better risk flows lift it above 86.50
• AUD/USD improves to trade above .8700 in sympathy with euro
• GBP/USD rebounds above 1.5300 but 1.5350 proves elusive for now
• EUR/USD strong rebound triggers a short squeeze with 1.30 next

A burst of euro buying at the start of European trade caught the market completely by surprise in the wake of negative news from Hungary and Ireland. The euro had come under  some selling pressure earlier in Asian session trade after Hungary failed to reach an accord with IMF over the country’s plan to shrink its budget deficit in 2011. The talks with IMF broke down over the  issue of a newly proposed bank tax by the Hungarian government that the IMF believes to be too large as well as the absence of a coherent plan to control the country’s fiscal deficit.

The failure of the talks will result the suspension of the remaining $25.9 billion in credit lines available to Hungary – a fact that could greatly hamper the country’s ability to raise new financing on the capital markets as investor enthusiasm for Hungarian assets sinks. However, because Hungary is not yet a member of the EMU its sovereign debt problems will have only a limited impact on the euro itself.

Even the latest down grade by Moody’s of Ireland to Aa2 from Aa1 failed to push the single currency lower, as FX traders casually shrugged off the report. Moody’s noted  Ireland’s steady deterioration of debt affordability and the weekend growth prospects for the country’s finance and real estate sectors as key factors in it decision. The euro however proved immune to the latest risk aversion news, soaring more than 100 points off lows to trade 1.2975 by mid morning European session.

The pair was lifted by a prime US name creating a massive squeeze at the European  open  as shorts were completely wrong footed by the earlier price action.  The EUR/USD now looks to test the 1.3000 level once again  as its rally shows remarkable resilience. Nevertheless, despite today’s impressive turnaround we believe the unit could face more serious resistance as it climbs above the psychologically key level.

The rally in the pair over the past several days has been predicated not so much risk assumption flows but rather on the idea that EZ growth may exceed  US growth as we move in to the second half of the year. However, since growth in the EZ is led by the export sector  that thesis could prove tenuous at best as the drop off in demand  in US leads to a domino effect of slowdown in growth in Asia and Middle East. For now  the euro is gaining ground due to its old familiar role as the anti-dollar bet, as investors become increasingly worried about US economic  growth going forward.  However, as we’ve seen today, the sovereign debt problems  that have dogged  the unit since the start of the year, have not  been resolved and could revive once again if the results of the banking  system stress tests due this Friday prove disappointing.

With no major economic data on the calendar for the rest of the day, trading in the pair is likely to be driven by technical  flows as the tug of war around the 1.3000 level continues. Today’s impressive rebound in early European trade suggests that for the time being the path of least resistance is up as longs try to mount a convincing break above 1.3000 possible precipitating yet another short squeeze higher into North American trade.

FX Upcoming

Comments (2)

Semaj

July 19, 2010 at 07:38 AM ET

B, how do you think the FinReg bill can affect the USD?

It seems as though the USD has been gaining some momentum across the board except for the Eur cross as you have posted. Dollar index is @ a 78.6 retracement and technically still bullish on a 4 hr and if it holds could be the factor in keeping the Eur/usd below 1.30.

bschlossberg

July 19, 2010 at 07:46 AM ET

1.300 is a key battle and as of now the longs are winning, but I still find it hard to believe that euro will extend much beyond that given the sovereign debt risk still extant.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.