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Euro Advance Falters before it Even Begins

Euro Advance Falters before it Even Begins

2010-03-30 18:53:00
John Kicklighter, Chief Currency Strategist
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Confidence was briefly restored to the euro these past few days after the European Union reached an agreement to offer euro-based bilateral loans in conjunction with IMF support to Greece should the nation require assistance. This was the next evolution of the region's efforts to support its weakest memeber after forcing the Greece to produce deeper austerity cuts and voicing confidence the nation would not in fact require additional support. However, just like these previous steps, this new plan is filled with gaps. What would signal a rescue? What are the rates the IMF and Euro-area will charge? What if another EU member comes on hard times and requires similar aid? It should be clear at this point that region's stability is fully dependent on market sentiment itself and not questionable promises. In a sign that difficulties persist just days after the accord was made, the seven-year debt Greece auctioned off successfully yesterday dropped in its first day of active trade. Furthermore, a new 12-year issue today fell far short of meeting its cap while existing debt yields and credit default swap risk premiums both surged. Clearly, things are not moving along swingingly. Should general market sentiment itself slip, the euro will quickly come under pressure.

Positioning while Greece's bailout contengency plan is offering short-term relief and general risk appetite is still at risk is difficult. My existing euro-based positions (EURUSD and EURJPY) were both pushed overnight with brief advances above 1.35 and 125. However, neither has yet to hit the stop set beyond this overhead. Though both the dollar and yen-based pairs are highly correlated, my exposure is not too exaggerated thanks to the reduced position size of EURJPY (I am prepared to jump in on a bullish break from EURJPY above 125). As for the other yen crosses; there are interesting but early setups. EURGBP looks like it may close below its 100-day SMA; but the break has reduced technical significance. As for the commodity-based pairs, they are all moving towards new multi-year lows; but I don't want to jump in on such a mature trend. Outside of the euro's influence, I am still holding my short AUDUSD position; but this position is just around breakeven with a stop set above the short-term descending trend at 0.9260.

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