Category Archives: EUR

Weekend reading: catching up on EU Summit

I was out of the country and out of touch with markets last week and it has been hard to catch up with the European soap opera after missing a few episodes.

First here’s a quick guide to what happened in the EU.

The UK press has been helpful. Here’s a good article in The Guardian on seven key questions Britain must face after Cameron’s EU veto. The final three questions are the most compelling.

Britain may be forced to recognise sooner rather than later that by embracing the self-fulfilling prophecy of Eurosceptic rhetoric. Europe and the world has indeed become a more difficult place for the UK to exert its influence.

The Guardian’s news blog is also a helpful takeoff point.

The big loser in the papers so far appears to be Nick Clegg, leader of the Liberal Democrats, who are the junior coalition partner. His party’s position has always been pro-Europe and now he doesn’t appear to stand for anything. Clegg certainly doesn’t sound happy:

I’m bitterly disappointed by the outcome of last week’s summit, precisely because I think now there is a danger that the UK will be isolated and marginalised within the European Union.

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Gotta give the euro credit

Someone out there sure likes these things.

The bad news has been almost relentless since August but the euro continues to hang in there. At 1.33, EUR/USD iss down almost 10 cents in that time but that’s not bad considering the existential crisis pounding away at the bulls. Moreover, EUR/USD is holding above the 2010 low of 1.1876 and the 2009 low of 1.2331. We are almost at precisely the same levels as this time last year.

I’m bearish on the pair and that isn’t going to change any time soon but I have to concede that given everything we have learned in the past year, I’m impressed the experimental currency is hanging in there. The banks and countries are bordering on insolvency and a recession is on the horizon but someone is still buying.

You have to wonder where we would be if Europe’s banks and governments had some a slightly better job of managing their books. It may take a long time to sort out and that will undoubtedly keep the downward trend going but I’m starting to think that one day the euro will soar from the ashes, in some form.

It would be easy to point at the other side of the equation at USD but the analysis doesn’t hold up. The euro is well above its credit crisis lows against GBP and CAD while holding above the early 2011 lows in AUD and NZD.

EUR/USD rallied into the end of last year and everything tells me it will do the same in 2011. The speculative market is heavily short but the next 10 days will be round after round of short covering.

I don’t fight long term trends but my best idea here is to hope for a selloff on Friday/Monday and then jump in around 1.32 with 1.3144 as a stop and a target of 1.35.

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Last Gasp for The Euro

The news out of Greece is good. A coalition has been struck that will pass the EU-mandated reforms in order to receive the upcoming aid tranche. Papandreou will step down, a new PM will be named Monday and an election will be held after the aid is dispersed.

Barring any surprises (and they can’t be ruled out) this clears the way for a short-term bounce in the euro, which opened the week at 1.3780. Looking at the chart, I expect a climb toward the 100-day moving average at 1.4040, or perhaps a shade below, followed by a prolonged downtrend that will be confirmed by a break below 1.36.

 

My trade will be to sell EUR/USD around 1.40 and hang on for the ride lower. I will add on a fall below 1.36 and take profits after the first significant spike lower, or 1.32.

The two catalysts I envision for the move lower are slower growth, highlighted by further ECB cuts and political discord, which will resume in Greece in the elections and is likely to arise in Italy.

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Greek Referendum Could Be a Gamechanger

Greek Prime Minister Papandreou had a Halloween surprise for markets on Monday as he announced a referendum on the EU bailout deal. The move was completely unexpected and could throw Greece (and Europe) into chaos. The euro dropped almost 100 pips as the news hit.

The Greek public will decide whether or not to accept the troika bailout terms. It seems almost a certainty that voters will reject the deeply unpopular austerity measures, a move that would force an early election.

The referendum is slated for January and the only hope seems to be a constitutional clause that says referendums can only be held on matters of great national importance. Some are saying the current situation doesn’t apply, as hard as that is to believe.

Another hope is that Papandreou will not last long enough for a referendum, he may be defeated in a confidence vote on Nov. 2-4.

The current thinking is that Papandreou wants out or that he wants to share the responsibility of the failure of the state with the public. Bondholders who accepted a haircut only two days ago may already be having second thoughts.

Turning to the forex market, the news today highlights the endless uncertainty that will plague Europe for years to come. The euro was absolutely crushed today, falling to 1.3848 from the close on Friday at 1.4146.

The reversal back below the 55, 100 and 200-day moving averages and the close below these levels at the end of the month suggests the rally was a false breakout. Knowing that the market was positioned heavily short (via CFTC COT) it makes perfect sense. Thursday’s rally was nothing more than a massive short squeeze.

I expect a half-hearted rebound in the next day or two and I will be looking to sell it.

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Not Reaching for the Falling Knife

The news was bang on consensus. The EFSF, bank capital and the Greek haircut were all in line with what everyone was expecting yet markets have reacted as if hit by a bolt of lightening.

To some extent, I get it. I was evidently one among many who thought European leaders wouldn’t be able to pull it off – the boat was tilted far too heavy to that side and the reckoning is here.

That’s not to say there aren’t risks. Nothing has been finalized and the devil is always in the details.

I’m of the firm belief that economic growth will continue to disappoint. Even today’s GDP report showed the rise in consumer spending tilted towards healthcare and utilities at the expense of the savings rate, suggesting the consumer is tapped out for everything but the essentials.

The Bank of Canada took a dovish approach this week and the ECB and RBA may both cut in the week ahead. There is a tremendous opportunity to short CAD, EUR and AUD today and those would be my three favourite trades. But there is no rush, I have little doubt that selling EUR/USD at the tail end of US trading today would yield an easy 70 pips, but let’s see if we can set-up for something more.

The dollar was the worst performer, followed by the yen. The Swiss franc led, followed by the euro.

Of all the strange things today, the CHF rally is the strangest. How on earth is CHF rallying in all this? The only answer is that the SNB sold some of their euros into the rally.

The first chart to check out is AUD/USD. If anything is overbought, it’s this. The resistance at 1.0764 is a stop that makes for a good short-term sell.

 

Buying USD/CAD longs is the trade I’m looking for right now but if I had a gun to my head, I would be selling because 0.9800 looks like it’s coming.

Finally, I can’t say that I’m crazy about the euro. The ECB is probably going to cut rates tomorrow but with the momentum the way it is, any short for more than a 70 pip move is too risky.

 

 

 

 

 

 

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After the Greek Haircut it’s Time to Focus on the ECB

So much is going on in Europe. The number one thing I’m waiting on is the Greek bond haircut but something around 50% seems fairly certain at this point. The euro will rally once there is an agreement but it will be telling to see how much it rises.

Quick recap/analysis of today’s news:

–          EU agrees to 9% bank capital ratio. €106B to be raised, with 75% of it in Greece, Spain, Italy and Portugal. The list of how much banks in each country must raise is here.

There is no way Greek banks can raise €30 billion so that money is coming straight out of the EFSF. I don’t know all the details of European financials but I’m eager to see how they react in stock markets tomorrow. I’ll go from there.

There is also to be a question about whether convertible debt will count toward the ratio but I’m guessing Germany and Spain will lose.

Berlin and Madrid are mounting a last-ditch bid to lower the bar by allowing a broader range of capital to be used as part of the “temporary buffer”. German and Spanish banks in particular will have a lot more work to do to reach the new, 9 per cent core tier one capital ratio if they are not allowed to count some hybrid forms of capital. (link)

–          No concrete news on the EFSF but it sounds like a two-pronged approach. 1) first loss guarantees on new periphery debt 2) Use the EFSF and get investors (China) build a fund that will buy debt on the secondary market.

For instance, Italy will need to issue about €300 billion next year. If the EFSF guarantees the first 20% of losses, that would amount to €60 billion. If Italian funding is still under strain, the second approach will be implemented.

At those rates, the EFSF will be swallowed up fairly quickly. The longer-term risk is that debt markets get addicted to the EFSF backstop and that it will never be removed. On the face of it, it’s an okay plan. The near-term risk is that the details fail to impress.

–          Italy delivered a letter of intent to reform spending and sell €15 billion of assets over the coming three years.

A fist-fight broke out in Italian parliament about pension reform after an opposition leader said coalition partner Bossi’s didn’t favour pension reform because his wife retired on a generous state pension at the age of 39 from her job as a teacher.

I would say stability in Italy is a major question mark right now and Burlesconi is a major liability. The whole thing could come crashing down because of these idiots.

As I mentioned, the Greek haircut news is really the last piece of the puzzle for the immediate term. The market will then immediately shift its focus to the ECB’s Nov. 3 meeting, just one week away.

Although this is the first meeting led by Draghi, I don’t see him hesitating to cut rates.

Regardless of the outcome, the market will make a strong push to price in a dovish scenario over the next three days. I’m not trading this news but I would like to sell a post-Greek-haircut bounce, especially if a spike over 1.40 looks like a short squeeze.

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Trade Review: EUR/USD (-170 pips)

Entered EUR/USD short at 1.3766 on 19 Oct. Stopped out 24 Oct at 1.3936. Result: -170 pips.

Entered with a stop at 1.3936 and a target of 1.32. Greatest open loss: 170 pips Greatest open gain: 110 pips.

It’s frustrating to be right on the macro front but get the levels/timing wrong. That’s what happened with my EUR/USD short.

I entered the trade thinking there would be a European resolution on the weekend, as planned. I was right about the Guardian story being bunk, my read on bank recapitalization plans being ratcheted down was right. Economic news has also been disappointing.

I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.

That prediction rings true. (the full reasoning is here)

What concerned about a further stock market rally but I thought 1.3936 and the 55dma would cap the rallies. I was wrong.

What I didn’t anticipate was the round of repatriation that’s going on at European banks. The threat of higher capital ratios is causing them to reduce exposure abroad and bring euros back. They are also said to be holding back on dollar lending.

What I’ve learned: As soon as the story changes, get out. The moment it became apparent that European leaders were changing the timeframe, I should have got out. I also should have recognized that there are/were way too many moving parts in the euro story to accurately forecast everything. It’s not like forecasting Australian CPI or a Fed meeting. I should have been more disciplined with the entry level.

 What I’m happy about: the initial timing of the trade was solid. I was up 80 pips within a few hours. I’m also pleased with my overall assessment of the outcome. I wish I were still in this trade because the euro is going to fall. But this is the first losing trade I have had in awhile so I’m not going to compound it by chasing.

I’m looking at USD/CAD longs once again.

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EFSF Guideline Report is No Decisive Solution

The euro jumped 100 pips in a flash on the release of the EFSF guideline report. The move is nonsense and has retraced completely. EUR/USD has fallen as low as 1.3656 which is 120 pips below our trade entry point. Let’s take a closer look at the news.

There is nothing remarkable about the text of the document. It merely gives the EFSF power to purchase bonds in the secondary market, something that was widely expected. It also allows for credit lines to governments for the specific purpose of bank recapitalization but only as a last resort. The rules are effective immediately.

Intervention should be done “on the basis of ECB analysis and following a decision by mutual agreement from member states” and the condition for access requires “continued compliance with appropriate policy reforms” dictated by euro area finance ministers.

This draft may be all that’s accomplished this weekend. The latest reports suggest another round of meetings has been set-up for next week because of disagreements over leveraging the EFSF and the size of the Greek haircut.

“There will be no agreements,” said one senior German official. “This will now happen Wednesday at the earliest.”

The weekend will flop but the stone has been kicked down the road. There is a chance that 1.3650 breaks as headlines disappoint. I’m tempted to book profits if we see a large EUR selloff before the weekend.

Negotiations are divided on the French idea of turning the EFSF into a bank. Germany is adamantly opposed but may be growing isolated. If Sarkozy is able to force the idea forward, it would be the worst-case realistic scenario for EUR shorts.

In other news, Germany cut its growth forecast for next year down to a paltry 1%. It’s hard to imagine any other economies in the region doing any better.

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Selling EUR/USD at 1.3766

I have been on the sidelines and lacking conviction for the past two weeks.

First, I was expecting the US economy to fall harder and faster. More importantly, the Merkozy ‘promise to deliver a plan’ on Oct. 10 generated a 500 pip rally that left me scratching my

The headline risk surrounding this Sunday’s EU Summit became enormous. Yesterday’s Guardian article saying “France and Germany have reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a “comprehensive plan” to resolve the sovereign debt crisis.”

Aside from the numerous examples of bad grammar in this story (reached agreement?) there has been a wave of denials that has me convinced this story is bunk. The nail in the coffin was a WSJ report saying a bond insurance plan would be illegal under Europe’s no-bailout clause.

In addition, expectations are being ratcheted down for European bank recapitalization. The Greek bailout is fully expected but disappointing periphery growth is not.

It’s very difficult for me to price in what’s expected from the European Summit but betting against European policymakers has been the best trade of the year. Merkel and Finland’s PM today tried to scale back expectations but the market isn’t listening.

In addition, sentiment data remains negative. I’m a big believer in the University of Michigan consumer sentiment survey as a leading indicator. Last week, it was once again near a 30-year low and the lowest non-recessionary level ever.

I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.

In Outcome 2, we may see the euro rally on the news. I believe this will be short-lived and an incredible opportunity to sell.

My plan is to sell EUR/USD now with a stop at 1.3936. It’s a wide stop, at almost 180 pips but I’m targeting a drop back to 1.32 – a 560 pip reward. I’m also prepared to add to this trade in the high 1.38s.

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Euro Slides on Portuguese Downgrade

A Portuguese downgrade dragged the euro lower in generally quiet trading. The Swiss franc appears to have regained its footing as US stocks declined for the first time in six sessions.

The lone market-moving news was from Moody’s who slashed Portugal’s rating to Ba2, down four notches and below investment grade. The move is ominous and suggests a very high possibility Portugal will need to follow Greece toward a second bailout. EUR/USD fell as low as 1.4397 but has rebounded to 1.4426. See the earlier IMT for more.

The euro was spared by expectations of a rate hike on Thursday. Traders looking to exploit further sovereign concerns in Europe should look to the Swiss franc. It has rallied broadly and will not be overwhelmed by the ECB decision. The commodity currencies were all lower versus CHF on Tuesday after 5 days of gains. Another trade that was boosted by the flight to safety from Europe was gold as it surged $30 to $1515.

Unfortunately, the data calendar remains scarce. The lone release in Asia is Japan’s May preliminary leading indicators report. A rebound to 99.8 from 96.2 is expected but the report is unlikely to have any market-moving impact. In Monday’s session, rumours circulated of a Chinese interest rate hike this weekend. Moody’s also spooked markets with a report saying local government loans may default at a 10% rate. The fallout may dictate trading on in the hours ahead.

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