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Dear Euro Bulls, We Need Substance and Not Speculation

Last updated 11/28/2011 9:13 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The new trading week has started with a bang thanks to record breaking sales on Black Friday and tons of speculation that Europe is at the cusp of providing themselves with new support or receiving external aid from the IMF. The euphoria from post Thanksgiving Day shopping carried over to the financial markets but given the high level of unemployment, Americans are living above their means which implies that investor optimsm may be misplaced. Even if Americans feel that it is their patriotic duty to spend, can we really expect this strength to be sustained throughout the entire holiday shopping season? The reality of the matter is that strong holiday shopping does not mitigate the risk of a U.S. recession. Black Friday and Cyber Monday may produce strong results, but unless retailers continue to lure in consumers with sharp discounting which inevitably kills profitability, they will have a very tough time keeping their cash registers ringing. With this in mind however, it is irrefutable that sales were surprisingly strong on Friday and this will help bring much needed relief to U.S. equities. U.S. new home sales will be released at 10am ET but the housing market report should have only a limited impact on the dollar. Even if sales decline, the strength of Black Friday sales will overshadow the weakness in a sector that has long trailed the recovery. 

Across the Atlantic, there has been very little substance to the speculation of progress on the EU debt crisis which is why we remain skeptical of the recovery in the euro. The IMF debunked the rumor that they are preparing a EUR600 billion loan for Italy while talk of AAA Elite bonds were also denied by the German government. There have been more denials than affirmations from European officials this morning but the euro's ability to hold onto its gains indicates that investors are still holding out hope that EU officials will make good progress on a new fiscal pact that would prevent the Eurozone economy from collapsing. With Eurozone finance ministers meeting in Brussels tomorrow and EU Finance Ministers meeting on Wednesday, there is a realistic chance of progress and that is the main reason why the euro has rallied. Belgium also managed to sell all of its bonds on auction despite being downgraded last week. They paid the highest yield ever but the market is just happy that the bonds were bought period.   We don't expect a new rescue plan, an agreement to issue joint bonds or changes to the EU Treaty to be announced, but any hint of cooperation is all that euro traders need to be scared out of their short positions. Even if European Finance Ministers stay mum on support for the Eurozone, there are 2 opportunities next week for a big announcement - at the ECB meeting and the EU Leaders Summit. We aren't surprised by the optimism in the euro ahead of these important gatherings, but given the track record of European governments, the challenge of reaching an agreement that satisfies all 17 nations, the vigorous denials that plans are in the works and the risk of further downgrades by rating agencies, the EUR/USD could still have tough time sustaining its gains. Until there is substance to any of the rumors and speculation in Europe, euro traders should be cautious. With Italian bonds being auctioned off on Tuesday and Spanish and French bonds being auctioned on Thursday, expect more volatility in the euro. 

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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.