Doubts remain about the ECB’s willingness and ability to intervene in bond markets—after all, the ESM can’t come into existence until the German constitutional court says so (expected Sept 12) and many other issues remain, such as ECB seniority. But the shift in the political landscape is becoming less foggy. Today’s WSJ article on Monti’s political maneuvering at the June 28 summit is a useful reminder of the dynamics.
The FT writes that the FX market is undergoing a “rare attention shift away from the euro” now that Draghi has asserted leadership. Attention shift? Really? A lack of chatter about the remarkable developments should not be confused with lack of attention.
We are willing to accept that something basic is changing, but worry that traders are far too impatient to trade with the change without a steady stream of headlines to keep them on course. Thus, after only two trading days and one weekend after the Draghi assertion of leadership, traders are already talking about where the current move will end and a pullback take over. The problem with pullbacks is that sometimes they take on a life of their own. The current move should face strong resistance at 1.2450, 1.2560 or 1.2747, all at or near previous highs or one Fibonacci level or another.
Fear can return in a nanosecond. Again citing the FT, markets are altogether too relaxed and sanguine. Conditions are awful and do not warrant a drop in VIX and other financial stress indicators. “The Vix index of implied volatility – known as the Wall Street fear gauge – seems giddy. It rose fractionally on Monday but has been lower (indicating less risk) than Friday’s close on only 28 days since the credit crunch began five years ago this week. The bad news is that almost every time in those five years that Mr Market relaxed, investors went on to lose money. Only on two of those 28 days would a buyer of the S&P 500 index have made a profit in the next six months. Furthermore, speculators are long equities, bonds and oil all at once. As Graham Secker at Morgan Stanley points out, this has been an excellent signal of overconfidence for the past five years. The average loss on European equities six months later was 4.5 per cent.”
And it’s never different this time. One of the interesting characteristics of the FX market is that when prices start looking overdone, traders seek news that they can choose to interpret as justifying a pullback. It doesn’t matter whether the news actually carries the chosen implication—any old excuse will do. It can be Chinese data, a comment from a European official (where’s Regling?), or a stray remark by a politician. But for the moment, the news is still pretty good, including the intention to form the pan-eurozone banking authority before the German constitutional court rules on Sept 12. It’s a long way to September but maybe that’s enough to hold the line. We think any pullbacks may be small. The euro has magic and the dollar does not.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|