I told you I was sick – and other European oddities

When it comes to having fun on a Thursday night nothing beats sitting and watching the EURUSD as you wait for the results of the Spanish bond auction. In a similar fashion to waiting for the NYE fireworks to begin nothing happens at all and then – BANG. The euro started to fall – even faster than it had during the Asian session. This must mean the news had been disastrous for Spain. Or so you would think. As it turns out, some of the pundits had been right when they suggested that a terrible auction would firm up the odds of Spain having to go cap-in-hand to the ECB and the next bailout party could begin in earnest.

Over the past few sessions you can see that the EURUSD has been consistently weakening – not to script – QEIII was meant to make it go the other way right? I will come back to that in a moment.

If you take a look in the FT this morning there is an article entitled ‘EU in talks over Spanish rescue plan’ which is all about how the ECB is firming up the details of how to deal with Spain is a bailout is requested. You will recall that the country in question has to ask for support before any will be given. You will remember that all of this has happened because borrowing costs have become frighteningly elevated for a number of European countries. Last night Spain sold 4.8 billion euros worth of bonds across 3 and 10 year maturities with the 10 year yield falling from 6.6% to 5.7% and with more money being raised than had been targeted. The euro fell on the back of this! Because people want the Spanish to have to get money from the ECB!! Wasn’t the fear that they wouldn’t be able to raise the money on their own?

Central bankers are often said to be ‘jawboning’. This is when you are very clear about what course of action you will take under given circumstances and it can be very effective when the market believes you. It can be thought of as monetary policy on the cheap. ECB boss Mario Draghi did exactly this with statements about doing whatever it takes to save the euro as well as planning to purchase bonds to keep yields down. Low and behold Spanish yields fell and yet this is being seen as a negative based on the response from the euro – for last night anyway. In reality I suspect this response may well have been overdone and in the short-term I think a move back to the high side of the 200 hour moving average would be quite telling. I know that a lot of technicians have been looking to buy the dips on a mid-term basis on the EURUSD but I would think the last 48 hours would have proved tough to withstand if you are already long. Overnight though there was some relaxing of pressure on a number of other currencies such as the CAD so the worm may well be turning.

Overall though we have the USD, EUR and JPY all being exposed to some form of QE’esque package or another which means that the race to the bottom is on again. The Brazilian Finance Minister is not impressed with this (on the US front at least) and I would wager he isn’t alone. The gauge that I am looking to on the impact of currency devaluation from a trader perspective will be where physical commodities head. Overnight saw the first decent bounce in the oil price for some days. This may be just a corrective move from recent falls but moves on oil, gold and other commodities is likely to be telling as to how seriously the world is taking the devaluation of the USD.

The last thought on the devaluation argument can probably be settled by looking at the weekly chart of gold. Once it climbed above the +1.25 standard deviation band of the 200 week moving average the uptrend was well in force so this is a good long-term theme. In the short-term though your exposure needs to be carefully managed – as Ric Spooner suggested yesterday the coming days for gold may be quite counter to the macro trend as you can see by clicking here.

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