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Spain: Will They or Won't They?

Last updated 9/21/2012 5:03 PM EST (GMT -5) 2 Comments

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Spain: Will They or Won’t They?

The North American trading session reminded me of bit of an amusement park ride today. To call it a roller coaster would be giving roller coasters too much credit as they haven’t invented one that captures the speed and voracity of some of the market moves today. The EUR/USD in particular whipsawed just about everyone as it surged up 90 pips, fell off 80 pips, then jumped up 70 pips, and then dropped again 60 pips before settling in a 30 pip range for the rest of the day. All of that price action occurred within 10 hours as the European market was winding down and the North American market was kicking in. So what caused all that insane volatility? Good old fashioned, European rumors.

Now that the game of guessing what central banks from around the world are going to be doing with their endless pools of liquidity, we are now back to guessing which country is going to be bailed out and when. Spain is the frontrunner at the moment as a media report indicated that Spain was in talks with European officials on the terms of their bailout that they were to officially request on Thursday of next week (90 pip jump). Then an Italian official was quoted as saying that neither Spain nor Italy were interested in giving up their sovereignty by requesting the bailout, especially when bond yields are so low at the moment (80 pip fall).

Once everyone realized that the official was from Italy, not Spain, and that rumors can’t be substantiated until they are denied by a politician, they were in the mood to buy again (70 pip rise). Finally, news from European officials was released that they were talking to Spain about restructuring, not bailouts (60 pip drop). After all that churning, many investors headed for the exits, frustrated with the lack of clear trends, or looking to find the nearest wastebasket to assuage their motion sickness (30 pip range).

So now the question on everyone’s mind as we head in to next week is what Spain will do. The Catch 22 of the whole situation is that Spanish 10 Year bond yields are comfortably below 6% and have been falling ever since the European Central Bank manufactured confidence by introducing the Outright Monetary Transactions toward the beginning of this month. If borrowing rates remain low, then Spain won’t need to request a bailout because they will likely be able to handle their own finances. However, if bond yields begin to rise, they will have to walk, ‘sovereignty hat’ in hand, to the Troika (ECB, IMF, and EC), and tap in to the unlimited OMT program. 

So while the market may rally in anticipation of the bailout coming to fruition, propping up the EUR/USD and driving down interest rates, it is simultaneously making the bailout date farther out. As investors realize that the date isn’t getting closer, risk takes a tumble despite the machinations of Quantitative Easing by the Federal Reserve, Bank of England, and Bank of Japan, impeding the recovery that those central banks are spending so much money to kick start. Oh, what tangled webs we weave!

Personally, I think today’s confused price action will turn in to skepticism as we start the new week and the markets may force Spain in to requesting the bailout the world so desires. In the process, Italian 10 Year bond yields will begin to make a run up as well, and we get to go through this whole charade again very soon. So take mental notes of how this whole thing goes down for Spain and we may be able to predict the outcome of Italy when that comes to a head in the near future.

Canadian Geese: The Transition from Hawk to Dove

For the past few monetary policy decisions in the Great White North the Bank of Canada has remained surprisingly hawkish in their opinion of the Canadian economy. Rising prices in housing, relatively healthy unemployment levels, and a AAA credit rating affirmation from Fitch, one of the major rating agencies, could be pointed out as reasons for that relative hawkish stance. However, since the BoC’s decision in the first week of this month, things have turned a little less rosy.

Fitch warned that if housing prices continue along their current path, Canada could be running headlong in to a housing bubble. In addition to that warning, Building Permits declined for the second month in a row; the Trade Balance accelerated in the negative direction for the fourth month in a row; and Sales in Manufacturing and Wholesale printed negatively for the fourth and second months in a row respectively. In addition to that bad news, the price of oil has begun to make a seasonal drop.

While many of the figures were neither too bad, nor too good, the BoC may be finding themselves between a rock and a hard place. Therefore, a policy stance of an in between nature may be in order. Turning all-out dovish may be a mistake since their neighbor to the south has been dovish enough that some of the stimulus they provide will likely leak over the border. Maintaining their hawkish stance could lead to unintended consequences of housing bubbles that could drag the economy down substantially. Therefore, a ‘goose-ish’ stance may be just what the veterinarian ordered. Backing away from aggressive communication allows the BoC to maintain status quo without anyone thinking they are being too over reactive on either side.

Looking Forward

As you may have assumed from the first section of this article, the Spanish decision on a bailout will likely be the biggest market influencer. However, there are plenty of events that could distract investors as they bide their time. For a full rundown of next week’s major market moving events and some technical levels on daily charts, check out my free, on-demand webinar Fundamental Outlook .

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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Comments (2)

Andy C

September 21, 2012 at 05:16 PM ET

I love this article, very well put Neal.....what a day!

Neal

September 24, 2012 at 10:04 AM ET

Thank you, Andy!

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.