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EUR: 5 Reasons why the Move is So Powerful

Last updated 10/27/2011 9:12 AM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

Although the title of our morning piece today is "5 Reasons for the Power Move" in the euro, we all know that there is one main reason why risk appetite has improved significantly over the past 24 hours and it is because Europeans leaders worked late into the night to come up with a comprehensive rescue plan for the region with the hard numbers that everyone had been waiting for. Investors around the world are cheering the fact that the Europeans have sucked it up and done what was necessary to mitigate a deeper crisis in the region.  Their sheer relief that the process hasn't been drawn out even further (aside from the fact that some technicalities need to be ironed out at the November Eurozone Finance Ministers meeting) has provided a nice boost to risk appetite.    

With that in mind, here are 5 reasons why the euro has performed so strongly this morning and why a run above 1.41 is possible.

1. The EU Rescue Package provides near term stability for the financial sector, lifting risk appetite and the euro

2. Greek Haircut of 50% reduces the losses that banks need to absorb, which is positive for stocks and risk

3. European Banks will need to repatriate funds to meet new capital requirements, which could mean more demand for euros

4. ISDA confirmed that the PSI will not trigger a credit event on Greek debt, which is positive for risk

5. Traders were short euros going into the EU Summit and now that a deal has been reached, it has triggered a wave of short covering

We have been optimistic that the Europeans would come up with something, knowing that the consequences of not doing so would be too severe and now that the announcement has been made, the euro, Australian dollar and other high yielding currencies have strengthened significantly. We expect the rally in the Euro to continue for the time being but traders need to be aware that as soon as a piece of bad news hits, the currency could give up its gains quickly because the rescue plan does not resolve all of the region's troubles. Greater financial commitments means greater austerity which can result in slower growth.  However in the meantime, the momentum in the market is on the side of euro bulls.

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Comments (2)

Darkdoji

October 27, 2011 at 11:28 AM ET

I am not the market and the market is not me - so it will trend where it will. But as an economist you simply ask and answer "what has been maximized" - in order to take a position. In this case the answer is time. They did not fix it as indeed they cannot. So it will unravel sooner rather than later and bunk down to 1.2733 or lower - mark my words. The analysis of market moves is not an analysis of fundamentals. For instance, the three big French banks most exposed to the Greek and Trojan Woes are up a great deal in share price - yet at only a third of their valuation. There are many, many more pointers to why nothing of substance has been maximized and why only time has been bought - but you need to know economics beyond the intermediate level to fully appreciate. When we say a 50% write down - for Greece it is for a purpose and in this case for that country to grow out of its debt and a rate that will not lead to another crisis any time soon. Well do the math - is that likely? The answer is no - They did not fix it.

traderwillie

October 27, 2011 at 10:08 PM ET

Have to agree with dark doji. We should see a bull move for a bit longer out of this, but in the end, the euro is as unstable as a house built on sand.

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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.