By FXEmpire.com
Last week, there were ever more signs that the Greek/ EMU debt crisis was entering some kind of ‘end game’. Greek politicians failed to form a new government and the country is preparing for new elections. It is almost impossible to anticipate the political constellation after the June elections.
Will Greece be able to form a government that can restart a real dialogue with the EMU? On the other side of the table, the stance of the EMU on Greece had become a source of uncertainty, too. Some EU policymakers didn’t formally reject the option of a Greek exit anymore. The risk of a disorderly outcome of the Greek debt crisis spooked global markets and reinforced the decline of EUR/USD. The risk of a Greek exit also reinforced contagion fears, with Spain now seen as the weakest link in the chain. Ongoing negative headlines on the Spanish banking sector and on the Spanish budget reinforced the bearish sentiment on the single currency. There were also several eco data on the agenda in the US and in Europe, but they were only of second tier importance for EUR/USD trading. The data in the US were mixed and didn’t change the course of events.
The minutes from the April 26 Fed meeting showed that several Fed members thought the Fed might have to do more QE in case negative risks to the recovery would materialize. In theory, this was a negative for the dollar. However, the focus was on the negative headlines from Europe. The single currency also ignored better than expected Q1 growth reported from Germany and the euro area. These data were seen as old news and were unable to overcome the uncertainty on the fate of the single currency. After the steep losses of late, the decline of EUR/USD slowed in the second half of last week.
EUR/USD reached a 4-month low at 1.2642 on Friday as the market was spooked by Moody’s who downgraded 16 Spanish banks and by a new downgrade of Greece from Fitch.
The headlines from Greece and Spain remained negative, but EUR/USD succeeded some kind of a short squeeze going into the weekend. In this respect, CFTC data showed that net shorts in the euro were at record high levels while net longs in the USD were at the highest level since mid 2008.
We stay cautious to draw firm conclusions from these statistics, but they are one pointer, suggesting that this market had overextended and becomes vulnerable to a correction. This is exactly what happened on Friday.
Investors reduced euro short exposure going into the G8 meeting and EUR/USD closed the week off the lows at 1.2780, still well below the close of the previous week (1.2917).
The G8 advocated a balanced approach between austerity and support for growth. The group said also that it wanted Greece to stay in the euro. Few people will disagree on these ‘conclusions’ but they don’t provide any concrete roadmap to solve the crisis. The global framework for markets is little changed from what it was before the weekend.
After the recent sharp decline of the Euro, a lot of investors positions have probably been adjusted in order to comply with the negative news flow and the institutional risk in Europe. We assume that this in the first place the case for non-EMU investors. However, for now, we don’t see a trigger yet for a sustained rebound of the euro, unless the market sees a reasonable perspective that the current phase of the debt crisis can result in a new and crisis-prove institutional framework.
Such a new framework is not impossible, but markets want to see hard political engagements and measures (euro bonds before a sustained rebound of the euro is possible. For now, we are obviously not that far yet. As long as this is not the case, we consider any upticks in EUR/USD as corrective in nature. They will probably continue to attract selling interest. So, in a day-to day perspective, a temporary breather on the recent sell-off is possible. In longer term perspective, we assume that the downtrend of EUR/USD is still intact.
Click here a current EUR/USD Chart.
Originally posted here
