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Euro Rallies on IMF Funding Rumor, Greek PSI Developments

Euro Rallies on IMF Funding Rumor, Greek PSI Developments

2012-01-18 14:28:00
Christopher Vecchio, CFA, Senior Strategist
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Fundamental Headlines

Fed Officials Open to Additional Easing as They Monitor Risks to Economy – Bloomberg

Germany Cuts 2012 Economic Growth Forecast – Bloomberg

IMF Looks to Raise $600 Billion in New Resources – Reuters

Romney Says He is taxed at around 15 Percent Rate – Reuters

Germany Sells Debt at Historic Lows – WSJ

European Session Summary

Overnight trading conditions were remarkably quiet after Tuesday’s session which was the first full day of trading following the Euro-zone downgrades on Friday and China’s strong but softer growth reading on Monday. In fact, a quick glance at credit suggests that the day ahead might be quiet overall: U.S. Treasuries are relatively unchanged ahead of the North American trading session; Italian and Spanish bonds are relatively unchanged; French and German bonds are relatively unchanged.

However, given our current place in the technical sense, this ‘stall’ in the trend is not surprising; many currencies and indexes are at key inflection points which would suggest a “breakout” or “retracement” is about to occur. Either way, the move should be dramatic and violent. For now, with an inside day forming on most charts – most notably the AUD/USD and USD/CAD – it does not appear the fireworks will happen today; most likely the end of this week or early next week.

Shifting back to fundamentals, the key pieces of information to come out of the European session revolves around the measures in place to bailout the Euro-zone. For lack of a better word, the only reasonable description of the recent rumor is, again, “ridiculous.” Why though? The International Monetary Fund is purportedly seeking somewhere between $500 and $600 billion to add to its funding resources. While this would be ideal, it is still required, by law, for U.S. Congressional approval to expand the IMF’s funding; this will not happen in this Congress.

EUR/USD 5-min Chart: January 18, 2012

Euro_Rallies_on_IMF_Funding_Rumor_Greek_PSI_Developments_body_Picture_1.png, Euro Rallies on IMF Funding Rumor, Greek PSI Developments

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Overall, all of the majors had forged higher against the U.S. Dollar, at the time this report was written. However, it is worth noting that the commodity currencies were starting to come off against the safe havens right around the 9:00 EST turn. The European currencies led the pack ahead of trading in North America, with the Euro pacing the gains overall. With the lack of conviction by the other majors, most notably the Australian and New Zealand Dollars, it appears that the euro’s rally was nothing more than short covering once more.

This could be the last bit of a rally for the Euro, as the European Central Bank prepares to unroll another long-term refinancing operation (LTRO), rumored to be up to €1 trillion. As the ECB monetizes debt through back channels and the secondary markets, the massive influx of Euros into the system will weigh on the value of the currency relative to its counterparts, most notably the U.S. Dollar. In fact, if the ECB continues to monetize debt and the Federal Reserve chooses not to unveil round three of quantitative easing, then the EUR/USD could see parity as soon as this summer.

24-Hour Price Action

Euro_Rallies_on_IMF_Funding_Rumor_Greek_PSI_Developments_body_Picture_4.png, Euro Rallies on IMF Funding Rumor, Greek PSI DevelopmentsEuro_Rallies_on_IMF_Funding_Rumor_Greek_PSI_Developments_body_Picture_10.png, Euro Rallies on IMF Funding Rumor, Greek PSI Developments

Key Levels: 13:25 GMT

Euro_Rallies_on_IMF_Funding_Rumor_Greek_PSI_Developments_body_Picture_7.png, Euro Rallies on IMF Funding Rumor, Greek PSI Developments

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index is lower, trading at 9960.63, at the time this report was written, after opening at 9980.73. The index has traded mostly lower, with the high at 9921.00 and the low at 9935.24.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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