As they say “hindsight is always 20/20.” Last Friday’s rally in the euro was meant to be sold, but initiating a new position on a Friday can be intimidating. The trade late Friday can always be interesting. Going back a few decades, before the internet and electronic trading, the close Friday was very important. After the close, charts would be printed, and expressed mailed to traders so they could study the charts on Monday.
The Friday close was important for the daily and the weekly charts. If you were a pit trader with a big deck or a big position, running the price through a known support or resistance level near the close was always a game that was lucrative. Absent demand or supply changes because of the new price, there would usually be price follow through the following Monday. Aggressive traders would usually go with the trend and take extra contracts home for the week end. There were always a few people who knew what was going on, but now with secret, silent electronic trading, everyone is in the dark.
Our point Friday was the political jousting was about to destroy the perception, the eurozone was destined for a period of blissful tranquility. With this many politicians in the large single currency area, something can easily go wrong.
Such was just the case when Spanish Premier Mariano Rajoy, next to Frau Merkel in Berlin, responded to a question from the media saying:
“I repeat what I said Saturday: everything that has been said about me is untrue: except for some things that have been published by some media outlets.”
Rajoy, of course, was responding to charges that he accepted payment from a slush fund of €25,200 per year for eleven years. Further clarification was not offered, but once a politician starts explaining he usually does not stop.
This caused the Spanish bonds to fall, sending the yield higher. Spain has refinancing needs of over €100B euros this year, and need to lengthen the maturity of their debt so this is not helpful. The weakness in the euro stopped and then rallied after positive EU PMI numbers were announced. The total EU Composite M/M Index was 48.6, better than the expected 48.2. Can one really believe, however, the biggest improvement came from Spain where the retail sales number was down over 10% and unemployment is over 26%.
Later this week, French President Hollande will deliver a keynote speech at the European Parliament. Prior to his election Hollande campaigned for euro bonds, and for less austerity and more emphasis upon growth. At a press conference this afternoon he complained the high value of the euro is hurting the economy and European exports; as a believer, the government can and should do everything. Market Watch:
“Hollande told European Union lawmakers in Strasbourg, France, that the euro shouldn’t be left to fluctuate according to the market’s mood. He called for the establishment of a foreign-exchange rate policy to protect the currency from ‘irrational movements’.”
But how do markets deal with irrational politicians?
Will the upcoming EU Parliament Summit Meeting this week reveal grand new plans, or will the meeting result in political acrimony? Usually there are good vibes going into the meeting, followed by disillusionment and, often, the market trades accordingly.
The EURUSD, after selling off to 1.3460, is now staging a recovery. We are willing to be patient, hoping to catch a recovery to the 1.3650 area where we will try the short side. I fail to concur with the assessment that the European economic situation is improving. Certainly, the Fed’s money supply is growing, as opposed to the ECB, but the German austerity plan is unsuitable for much of Europe.
Written by CashBackForex.com