Key News
* Germany’s Hypo Real Estate Said to Fail EU Banking Stress Test (Bloomberg)
* Moody’s cuts Ireland on bank, growth worries (Reuters)
* Hungary under pressure to agree with IMF (Reuters)
* C$ higher as Tuesday rate announcement eyed (Bloomberg)
The Event Agenda
Afternoon Run-Down
The euro in the past month has looked a lot like the U.S. stock market of early 2009: fishy.
On Friday, U.S. stocks were down nearly 3% … ten year Treasury yields were sinking well below 3% … commodity currencies were down 2% … the pound was down big. All signs indicated fear was in the air … i.e. risk aversion. But the euro held its ground, finishing down small on the day – seemingly incapable of trading lower.
Over the weekend we got news that the IMF pulled out of talks with Hungary over their differences regarding Hungary’s plans and objectives for cutting its budget deficit. And this morning, Ireland was downgraded by Moody’s. These news items pushed the euro below 1.29, but it was met with yet another illogical and violent 100+ point spike – the buyer at the lows said to be the Bank for International Settlements (BIS).
I think it’s clear that there is a coordinated official (government/central bank) effort to manage global sentiment and temper ugly market conditions by keeping the euro moving higher.
Perhaps it’s because other markets are beginning to look particularly bad, and a higher moving euro has a way of curtailing the selling pressure in other “risk assets.” Or perhaps the leaders of major economies know that a storm is coming for Europe and they’d prefer to see the euro trashed from the 1.30 level, rather than 1.15.
Do they know something we don’t? Is Europe headed for an imminent disaster? Maybe the European bank stress tests will offer a negative surprise? Not likely given the “stress-less”/ modest assumptions given to worst-case scenarios in the tests. Maybe the IMF/Hungary loan program will implode, making Hungary a trigger for default contagion.
For now, 1.30 in the euro looks like a reasonable area to expect its run to come to an end. The euro ran into trendline resistance, and a Fibonacci level, there last week, which has contained it thus far (see euro chart below).
But with the ongoing manipulation in the euro, it’s proven to be a very unforgiving currency to sell. Given the deflationary signs showing up in economic data and a potential for double dip recession, the more logically behaving currencies are commodity currencies – a more rewarding short for the moment.
Here’s a look at the charts …
Key Charts
Euro
The euro tested and backed off the 1.30 level on Friday, an area of good technical resistance represented by the rising trendline from the lows of 2008 which was broken in May, and now provides resistance. Also at 1.30 lies the 61.8% retracement of the move down from the 1.3692 highs in April to the lows of 1.1877.
Euro (30-day chart)
This chart below shows the recent divergence between eur/usd and U.S. stocks. The tendency is to sell euros and sell stocks together … an expression of risk aversion, favoring safer assets over stocks and the safety of U.S. dollars over euros.
But on July 1, when a confluence of economic data took 10 year U.S. Treasury yields back below 3% and the S&P below critical technical support, the probability of a double-dip recession started ticking higher. That day everything deemed risky was sold, but contrary to logic, the euro stairstepped higher all day – a clear warning signal for euro shorts. Since then we’ve seen episodes of divergence between the “risk-off” trade and the euro … assumably because China and the BIS are defending global confidence by propping up the euro.
U.S. Stocks
While the Euro has, thus far, held key resistance at 1.30 (a reasonable stopping point for the recent rally), the bounce in the U.S. stock market has been contained by the top-line of a descending channel. This could end the recent divergence in the euro and stocks, pointing both lower.
Hungarian Forint
With IMF/ Hungary talks breaking down, Hungary represents event risk to the euro and the global sovereign debt crisis. This chart shows the strong trading relationship between the euro and Hungarian forint. Today, that trade is diverging (the white circle)… as the BIS stepped in this morning to put a floor under the euro.
{ 1 comment… read it below or add one }
I have always enjoyed reading your insightful commentaries, and you made the following interesting comment:
“Japan’s intervention could be just the first step in a long, sharp devaluation of the yen. And in a world where unsustainable debt and deficits are prevalent and economies are fragile, this could ignite a wave of currency devaluations in other countries.”
I understand how devaluation is achieved when currencies are pegged to gold or another currency such as the Chinese Yuan is to the US dollar. But how is a devaluation achieved when currencies that are freely floating such as the Japanese yen vis a vis other currencies. Don’t they just print more yen (as you indicate they are doing right now against the US dollar?)
So isn’t that what the US Fed is doing right now? Printing money like mad? And if what you suggest (wholesale devaluations of many over indebted currencies) that implies that the world will be awash with cash, which could spark hyper-inflation in all the countries devaluing their currencies, and probably hype deflation in countries that choose not to devalue their currencies? Am I getting this wrong, do I have an over-active imagination?