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EUR Shoots Higher on Prospect of a Deal By End of Oct

Last updated 10/10/2011 9:08 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

With the heads of the two largest countries in the Eurozone committing to reach an agreement and produce a new package of measures to stabilize the region before the November G20 Summit, there is a general sense of optimism in the market that has boosted the euro and other high yielding currencies. In fact, we have not seen such a strong recovery in risk currencies since August.  

Little details were provided from Merkel and Sarkozy but as the 2 main stumbling blocks to any major bailout package for the Eurozone, their cooperation has been warmly received by the markets.  The only concrete commitment that they have offered is to recapitalize banks because the greatest risk of a Greek default is the losses that it would impose to banks in the region.  They also promised that any plan would offer a long term solution for Greece, ensure that they remain in the Eurozone and could potentially involve a treaty change.  If Merkel and Sarkozy manage to come up with a decently structured bailout program that would mitigate contagion throughout the region, it would target the root of the Eurozone's problems and offer the nuclear solution that could potentially put a long term bottom in the euro.  This is of course a tall task and based on their track record, we are more skeptical than optimism because it is still unclear whether they can put their political agendas aside and deliver on their promises.  Nonetheless we have to respect the rally in the euro and acknowledge that the prospect of a deal has triggered more short covering.  France and Belgium also announced that they will nationalize part of Belgium's largest bank Dexia.  Infusing billions of taxpayer money into Dexia eliminates a near term high level risk for the market by preventing a default that could trickle over to other banks in the Europe and the U.S. However Dexia is also an example of why the Eurozone urgently needs to recapitalize its banks because it would help to shore up their finances, stabilize yields and hopefully increase investor confidence with the goal of ultimately preventing a Dexia redux in other countries. 

Recapitalizing banks in the Eurozone alone is not enough but with the EU Summit next week now postponed to October 23rd, hopefully the Europeans have more up their sleeve.  The U.S. bond market is closed for Columbus Day but the stock market and the forex market are open.  Volume will be lighter particularly with Canada closed as well which means we could have quieter trading during the NY session.  

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Comments (1)

Darkdoji

October 10, 2011 at 09:45 AM ET

This is where the market comes across as irrational - so how many times have the two promised and failed to deliver (nearly everyday) - and without any idea of what the package holds and whether it is implementable to the desired effect - the masses (AKA the mob) go ahead and rally (without doubt overshooting the mark). So what happens by Friday if things go wrong or later if the deal is not so sweet? The market then tumbles to correct (probably overshooting the mark at that time too). I am not complaining so long as they keep forming distinct tops and bottoms and consolidate long enough for me to enter my trades - it is a breeze making money in this kind of yoyo mode the market is in - just can't help wondering how different the players are from me and how different my actual reactions (as opposed to my trading decisions) are to these impulses - do not see how professionals in forex mainly act first and think about their actions later - running from pillar to post. I am learning however.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.