Currency Contest

Euro Still at Risk for Deeper Setbacks Over Coming Weeks

Joel Kruger,

Currencies continue with their downward trajectory against the US Dollar into the final day of the week, and it appears that many of the major currencies are now fated to retest their key October lows against the Greenback. The latest bout of risk liquidation has been brought on by a number of factors including Germany Merkel’s ruling out prospects for jointly issued Eurobonds and firm opposition to the idea of the ECB being a lender of last resort, along with Fitch’s downgrade of Portugal to junk status, and record-wide Italian bond spreads. Throw in some dovish comments from BOE Miles in reaction to the global slowdown and the Eurozone crisis, and some concerning comments relating to the Japanese economy, and the overall picture is not looking good for risk.

However, there has been one development over the past several hours which perhaps has slipped under the radar of many market participants who have been distracted with Thanksgiving holidays or the Merkel/Sarkozy/Monti mini summit. The FT has released  an article reporting that the Dutch have endorsed the idea of the ECB being a lender of last resort. This could provide some welcome support for the downtrodden Euro, with the Dutch endorsement coming as a surprise given their staunch opposition to this idea (perhaps more aggressive opposition than even Germany) up until this point. While Germany’s acceptance of the idea is certainly more important, this gesture could start to put more pressure on the Germans to finally accept the ECB as a lender of last resort.

Still, the Euro remains in trouble on a broader scale and we expect to see any rallies well capped. Technically, we continue to defer to the EUR/USD monthly chart, which has been extremely useful this year. The market looks like it has been in a steady downtrend since positing record highs in 2008, and is now in the process of a carving out the next major lower top below 1.5000 ahead of a retest of some multi-month range lows in the lower 1.2000’s. Once the lower 1.2000’s are tested, it is entirely possible that we see further acceleration towards parity, but at this point, it is way too premature to make such calls and we will have to step back an reassess when the market gets down to our lower 1.2000 area objective.

Looking ahead, markets should be quiet for the remainder of the day, with trade expected to lighten significantly into the holiday US trade. US equity futures are tracking lower, while commodities are also offered, led by declines in silver.