The single currency finally made a bit of a stand today, particularly against the USD and GBP. Is the squeeze on still short Euro positioning set to continue again? EURUSD 1.3000 holds the key.
Today saw the EURUSD unable to take out new lows as sub-1.2900 support has so far held and the pair rallied back into the heart of yesterday’s range, though it only gets a psychological boost if we see 1.3000+ again. Bunds were weak early in the day and EURJPY had a look at new lows, but much of that development had also been reversed by the time of this writing. Further signs that the Euro is finding support were found in EURGBP, which was unable to hold its new recent lows below 0.7950 on the day. The news flow was not particularly noteworthy on the day. As I said early this week, this week would be about trying to carve out a range and deciding when or whether the post QE-bonanza consolidation stronger in the USD and JPY is over with. Signs are out there that some investors are putting on “follow on” positions today, but again, 1.3000 is a more important pivot zone than what we saw today.
Chart: EUR/USD vs. IMM positioning
As a background note, I neglected to mention yesterday that the IMM positions (latest data released Friday end of day) continue to show how stubborn the EU Shorts remain, though there has been a large reduction. As of last Tuesday when the positioning snapshot was taken, there was still a net speculative short position of -73.5k contracts (about $11.8 billion). There are two ways to look at this: the bearish case is that there is far less of a position overhang than there was in early June, when specs were as much as -214k contracts short (about $30 billion!), and this is also the smallest short position since last November. On the other hand, the market is still very short and there may be more of a position adjustment ahead. I would expect that we need to see something closer to a neutral speculative position before we see the next major Euro downmove. Of course, specs aren’t dumb and the last time we were at these levels in 2011, EURUSD was trading at 1.37 and proceeded 1,000 pips lower in the coming weeks. Aslo, look in 2008 at how the speculative long disappeared as the EURUSD range traded near 1.6000. This was a good tip-off that the euro was overvalued. It’s the excesses that show the specs getting in trouble. From here, a move to 1.3500 (not my preferred scenario!) or several weeks of range-bound market behaviour could accomplish a reduction in the positioning. Stay tuned.
EUR/USD Vs IMM" title="EUR/USD Vs IMM" width="455" height="347">
Economic data
The very low Swedish PPI data did not feeding into any SEK weakness. Instead, we saw SEK strength in what switched to very much a risk on day by lunch time in the European session. EURSEK is at an interesting pivot area now after it completed a large consolidation weaker against the Euro and headed back lower. 8.45 is the short term EURSEK support focus.
Canada’s Retail Sales came out a bit stronger than expected and USDCAD shied away from the 0.9800/50 zone that is the critical upside resistance, and more specifically 0.9820 seems to be shaping up as an important resistance level. If the pair moves through this level in the days ahead, there may be considerable stops lined up back towards parity. Recall that there is a record speculative CAD long on here in the US futures markets.
Looking forward
Look out for the US Sep. Confidence data, a bit in focus after the August plunge.
Again, this week is relatively light on the event risks in terms of economic data, but we do have Spanish prime minister Rajoy presenting a draft budget for 2013 on Thursday of this week. This is a key element in the process toward Spain formally requesting a bailout. Spain’s leadership appears reluctant to take the step because of the necessary loss of power/face that comes with such a decision, so it is doing what it can to control the process as much as possible and establish a credible budget. The question is what will ever change the longer term debt deflation dynamics if Spain can’t devalue and the social tensions that will only continue to rise. See Steen’s Chronicle from yesterday on the subject of social tension and see AEP over at the Telegraph on the subject of Portugal, which is in quite a state over various government austerity plans.
As a background note, realize that Friday this week is not only the end of month, but also the end of the quarter, with all of the usual risks of end of month/quarter fixing flows.
Economic Data Highlights
- Japan Sep. Small Business Confidence out at 45.1 vs. 44.8 in Aug.
- Germany Oct. GfK Consumer Confidence out unchanged at 5.9 as expected
- Switzerland Aug. UBS Consumption Indicator out at 1.03 vs. 1.48 in Jul.
- Sweden Aug. PPI out at -0.5% MoM and -1.9% YoY vs. -0.2%/-1.2% expected, respectively and vs. -1.1% YoY in Jul.
- UK Aug. BBA Loans for House Purchase out at 30,533 vs. 28,100 expected and vs. 28,750 in Jul.
- Canada Jul. Retail Sales out at +0.4% and +0.7% less Autos vs. +0.2%/+0.3% expected, respectively.
- US Jul. S&P/CaseShiller Home Price Index rose +1.2% YoY vs. +1.1% expected and +0.59% in Jun.
- US Sep. Conference Board Consumer Confidence Survey (1400)
- US Sep. Richmond Fed Manufacturing Index (1400)
- US Jul. House Price Index (1400)
- US Fed’s Plosser to Speak (1600)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Aug. Trade Balance (2245)