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We can tell by the price action of the EUR/USD that investors are either scared of being overly short euros or genuinely optimistic that the worst of Greece's troubles are finally behind us. It is hard as analysts to understand this sentiment because a credit event for Greece, which is increasingly likely could still wreck havoc on the markets. However prices do not lie and the EUR/USD is gradually edging higher. Given the significant amount of short EUR/USD positions in the market, there is no question that fear of a short squeeze has been the main reason for the EUR/USD's resilience. Euro rose to its highest levels this year following the German IFO report that showed business confidence rising to its highest level since July. The EUR started to rally during the early European hours and gained momentum after the German IFO report printed at 109.6 versus a 108.8 forecast. Unfortunately the rally was stopped short by the European Commission's lower growth forecasts. They now expect the Eurozone economy to contract by 0.3 percent in the first quarter which would technically put Europe back into recession. The Eurozone is also playing with fire if Dow Jones is right in reporting that they are pressuring Greece to activate their Collective Action Clause. If even a handful of bond holders refuse to sign on to the PSI deal, credit default swaps could be triggered and the repercussions for the EUR and the financial markets in general would be significant.
Meanwhile healthier economic data out of the U.S. helped to keep risk appetite supported. Jobless claims held steady at 351k which is unchanged from last week's upwardly revised report - the revision was small, from 348k to 351k. Although fewer claims do not translate directly into greater job growth, as long as claims hover around 350k, it is consistent with an improving labor market. For the Federal Reserve, this means that there is no immediate need to increase stimulus which is good for the U.S. dollar, particularly USD/JPY. After rising for 5 consecutive trading days and enjoying a rally with virtually no correction since the beginning of the month, USD/JPY is finally meeting some resistance. Despite a relatively good jobless claims report, USD/JPY failed to extend its gains. From a fundamental perspective, we could see USD/JPY rise further as low jobless claims boost interest rate expectations and U.S. yields. However after such a strong rally, a correction, large or small is overdue. No additional U.S. economic reports are scheduled for release today but a meeting between Merkel, Van Rompuy and Barosso could lead to some interesting headlines.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
