The EUR/USD is in Pickle

By FX Empire Analyst - Barry Norman
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This morning, Asian equities trade mixed to slightly higher. This is a bit more positive that what one could hope after the performance in Europe and in the US yesterday. That said, sentiment remains very fragile. EUR/USD is off yesterday’s low but from a technical point of view, picture hasn’t changed.

Later today, the calendar is much better filled than was the case of late. This morning, the Spanish retail sales are worth looking at and the same is true for the German labor market data and the euro zone M3 data. With respect to the latter, the lending data might give some indication on the recent dynamics (or the lack of it) in the Europe economy. This is also true for the EC confidence indicators. We would be surprised if the European eco data would bring any supportive news to the single currency. In the US, we keep an eye on the US durable orders and the weekly jobless claims. As is the case for the European data, we doubt they will provide a trigger for a sustained improvement in global sentiment on risk. So, the focus will still be on Greece and even more on Spain.

The Spanish government will approve its 2013 budget. It will be a hard nut to crack and might cause additional session. In a somewhat longer term perspective, the approval of a budget might bring Spain closer to ask Europe for assistance. This might remove some of the recent uncertainty and it might also reduce to pressure on the single currency. Of course, the process of Spain asking for (conditional) support from Europe will still be a bumpy road and it contains a lot of political event risk. In the near future, we might also get the outcome from the audit on the capital needs for the Spanish banking sector. We look out whether the negative impact from Spain on EUR/USD might ease. That said, it was clearly not a good tactics to front-run on better news from Spain (or from Europe) and buy EUR/USD for that reason. So, caution (stop-loss protection) on any (new) EUR/USD longs is still highly warranted.

On Tuesday evening, investors had turned further negative on risk and this attitude hadn’t change on Wednesday morning in Asia. Spain, and to a lesser extent Greece were still mentioned as a good enough reasons for investors to scale back exposure on risky assets. The euro lost further ground in step.

EUR/USD changed hands in the 1.2870 area at the open of the European markets. There were again very few eco data to guide trading. It was all about (Spanish and European) politics, rumors and market speculation. After the policy announcements of the Fed and the ECB, markets are now desperately looking for follow-up execution. One cannot expect QE3 to have an impact on the US economy from the next day on. In Europe, markets are eagerly awaiting the implementation of the new crisis framework, with Spain in the frontline.

However, the (political) process to bring Spain under the umbrella of the new EMU crisis framework is a difficult one. Spain has internal issues and there are requirements from its European counterparties. Especially the domestic issues on Spain come again in the spotlight. The unrest in Madrid and headlines on separatist tensions in the Spanish regions yesterday illustrated the difficult situation for Spain. In addition, the Bank of Spain yesterday warned that the Spanish Q3 GDP will have fallen at a significant rate. This whole context caused investors to reduce risk and assets and to turn more cautious on Europe and on the euro. Spanish bond yields jumped higher. And EUR/USD drifted south and reached a correction low at 1.2838 at the start of trading in the US. Of late, US investors were often more positive than their European counterparts, but this was not the case yesterday. The US new home sales were also reported below the market consensus. More or less at that time there were headlines on the screens from ECB/Buba’s Weismann, that the ECB would not fill potential gaps in the Greece’s budget. So, there was no reason for investors to try to fight the risk-off trend. EUR/USD set a correction low at 1.2835. One note of confidence for the euro bulls: the decline of EUR/USD was moderate compared to the decline on the equity markets and the rise of the bund. EUR/USD closed the session at 1.2873, slightly lower from the 1.2899 close on Tuesday evening.

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