EURUSD squeeze continues into weekend but Greek obstacles weigh at the start of the week
The FOMC-inspired rally held its ground through Friday as US Q4 GDP came in on the soft side and in the absence of hard news headlines out of Europe; short covering and an evident desire to be long into the weekend saw EURUSD above 1.3200 in mid-afternoon NY trade. News of a swathe of Eurozone sovereign downgrades from Fitch had no more than momentary negative impact, rightly so in so far as their actions left all the new Fitch ratings at or above those recently established by Standard & Poor’s and with the agency maintaining its AAA stamp on all six of the sovereigns currently holding its top rating. The weekend has failed to deliver a resolution on Greece, and reports now suggest that the sticking point has shifted from the coupon (where agreement on a 3.75% level seems to have been reached) to more demands from the troika for control over the Greek budget. A German proposal for a ‘budget commissioner’ with powers of veto over Greek government spending would remove whatever veil of pretence remained of Greek sovereignty; predictably the response from Athens has been less than receptive. While the likelihood is that such a late hour proposal is just a negotiating tactic to force agreement, clearly the stakes have once again been raised; and the perception of increased risk of a Greek ‘event’ has led a USD recovery this morning. Today’s EU leaders summit looms large, but it looks like too many of the pressing issues (Greek PSI deal and the subsequent participation rate, related finalisation of a second Greek bailout, the fiscal ‘compact’, the ESM and initial capitalisation and whether it can run parallel with the EFSF to boost the firepower of the Eurozone crisis mechanism) are still works in progress. Unless and until the obstacles to the second Greek bailout can be cleared, EURUSD should be capped by the 1.3244 key retracement resistance.
IMM data adds to EUR upside risk/pain trade potential; we like AUDCAD lower
If, however, an agreement can be reached this week, there may be more room to the topside than many in the market anticipate – particularly if the ISM (Wednesday) and this week’s US job data fails to contradict increased market expectations of further Fed QE. We had flagged Friday’s CFTC/IMM data as likely to be of particular interest given that it
covered the period starting the prior Wednesday and which coincided with the start of the EURUSD run-up. So to see that net speculative short positions actually increased (to a new record of 171,347 contracts), suggesting that CTA-type accounts did not meaningfully participate in the rally, is particularly notable. This surely adds to the risk that above the 1.3244 retracement level, further capitulation by shorts, including IMM positions, could make for an accelerated move higher and quite possibly to at least the 1.35 level. Another notable feature of the CFTC data were that the net longs in both AUD and NZD extended – although neither is yet close to extremes. In contrast, the futures market remains net short CAD, adding conviction to our trade recommendation to be short USDCAD targeting 0.9800 by the end of Q1. The divergence in positioning also suggests a risk of a correction lower in AUDCAD; as noted in our FX Weekly, one key event risk for commodity currencies in general – but the AUD in particular – is Wednesday’s official China manufacturing PMI. Fitch’s placing of the major Australian banks on watch also support the case for a lower AUDCAD.
BNP Paribas