Euro shorts had their feet put to the fire on the surprising degree of German concessions at the EU summit. Many questions remain unanswered, but for now, the shorts are simply pressing the panic button.
Today’s market underlines that the short term speculative positioning has been short ahead of this EU summit. The announcements emanating overnight from the summit revealed a vastly larger concession from the German side than the market had imagined possible as recently as yesterday, when the continued focus was still on Merkel digging in her heels on the fiscal union/Euro-bonds front.
The new measures announced at the summit thus far are technically important for allowing a more direct use of rescue funds from the EFSF/ESM to prop up EU banks and peripheral sovereigns, but we still have to remember the inconvenient fact that the ESM/EFSF funds come from…EU sovereigns and this still amounts to addressing a debt problem with more debt. It’s more extend-and-pretend and use of liquidity to address a problem of solvency, but the German concessions have nonetheless provided enough relief for now to spark a relief rally/epic squeeze (depending on your point of view).
Chart: EUR squeeze, ahoy!
EURUSD squeezed mercilessly higher today. Is this the spark for a bigger rally or should we be more inclined to “Remember October 27, 2011”. That was a day that an EU Summit deal on Greek debt and a “leveraging” of the EFSF that saw EURUSD and risk assets explode higher. That rally was already over and done with the same day it started and EURUSD slid 1500 pips in its wake. The first test to the upside is the 1.2750 recent high and the 55-day moving average coming in near that level, then we have the more important 1.3000 level that is the last ditch resistance for bears.
EURCHF actually budges
Note on the EU news today that EURCHF has moved more than a few ticks north of 1.2000 for the first time since a brief intraday spasm back in late May, and before then since April. If we close at 1.2030 or so today (where it is trading as I type this) it will be the biggest open to close rally since a brief squeeze back in March. Note that the Swiss leading indicator data today was rather strong. Keep an eye on EURCHF as there is potential for the pair to actually continue to move higher if this bout of relief lasts more than a couple of trading days. It will be interesting to see the Swiss currency reserve data next Friday to see what the rate of reserve accumulation was in June, a month that shas seen a further aggravation of EU periphery spreads. One might think that even if the EURCHF is able to begin appreciating for a time on lower perception of EU risk, that the SNB might be tempted to slowly unwind some of its reserves to deleverage, providing some headwind to EURCHF upside. Considering where other Euro crosses have gone today, the EURCHF rally is still extremely modest.
Looking ahead
The question we all must ponder now is how long the rally lasts until Europe is again in trouble: are we talking about a few days or was this the ticket that buys the EU political leadership a nice summer vacation? A bit too early to tell, let’s see what the German spin is on the summit outcome today and how the market behaves next week, which very well may include an ECB rate cut. My inclination is to believe that this move could last between a day to two weeks rather than on the scale of the summer holiday. As a cherry on top of the Euro rally today and tightening of peripheral EU bond spreads today, we have Monti out today announcing that the Italian budget deficit for 2012 may turn out worse than expected.
The market reaction to the EU news is overwhelming for the moment, but let’s remember that next week is a critical one for economic data, with the usual major surveys and the US employment report up on Friday. The EU situation isn’t the only factor in the global economic outlook, after all, and there are other reasons to fret the trajectory of economic growth. We’ve also got corporate earnings reports kicking off in the coming weeks.
We also have the ECB up on Thursday, where we have better odds than at past meetings of seeing a rate cut. Stay tuned and stay careful out there.
Economic Data Highlights
Germany May Retail Sales out at -0.3% MoM and -1.1% YoY vs. +0.2%/+1.9% expected, respectively and vs. -4.3% YoY in Apr.
Switzerland Jun. KOF Swiss Leading Indicator out at 1.16 vs. 0.78 expected and 0.80 in May
Norway May Retail Sales out at +1.6% MoM and +4.2% YoY vs. +0.5%/+3.6% expected, respectively and vs. -3.7% YoY in Apr.
UK Jun. NAPM Milwaukee out at 60.2 vs. 55.1 expected and 57.7 in May
Canada Apr. Gross Domestic Product out at +0.3% MoM and +2.0% YoY vs. +0.2%/+1.8% expected, respectively and vs. 1.7% YoY in Mar.
US May PCE Deflator out at -0.2% and 1.5% YoY as expected and vs. +1.9% YoY in Apr.
US May PCE Core out at +0.1% MoM and +1.8% YoY vs. +0.2%/+1.8% expected, respectively and vs. +2.0% YoY in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
US Jun. Chicago PMI (1345)
US Jun. Final University of Michigan Confidence (1355)
China Jun. Manufacturing PMI (Sun 0100)
Australia Jun. AiG Performance of Manufacturing Index (Sun 2330)
Japan Q2 Tankan Survey (Sun 2350)
Australia May RPData-Rismark House Price Index (Mon 0030)
China Jun. HSBC Manufacturing PMI (Mon 0230)
John J Hardy,
SAXO BANK