Market finding it tough to draw a bead on the Euro

The Euro is zooming zanily back and forth as the headlines support, while the music in the background is still churning along in a minor key. Today’s squeeze partially deflated in the wake of the German parliament’s enthusiastic EFSF “Ja!”

Another squeeze developed today in EURUSD ahead of the German parliamentary vote on the “enhanced” EFSF package that was agreed at the EU summit back in the misty days of late July. There was endless speculation on the strength of the German vote, with the rhetoric moving to the degree of support from Merkel’s CDU and how her political fortunes would survive the vote rather than whether the vote would pass. The vote came in at an overwhelming 523-85, and within that vote, only 10 from Merkel’s own CDU reject. A recent poll of the German population suggested that 75% were “against further bailouts”. So while the outdated EFSF (the debate long ago transitioned to the even further EFSF/bailout measures that would be necessary  - which the recent suggestion of an SPV-like vehicle would address) can now proceed to the next country for ratification, one wonders what the status is for representative democracy. Of course, considering that the squeeze was already in progress on the Euro ahead of the vote, the kneejerk reaction of the wily market in the immediate wake of the strong approval vote was to actually sell the single currency.

Meanwhile in the background, Italy saw a shaky auction of less than EUR 8 billion (relative to a EUR 9 billion target) in various durations of debt at slightly above recent benchmark rates for everything from 2-year to 10-year debt. It was no watershed auction, however, as rates fell back within yesterday’s ranges.

More concerning for Euro buyers here should be renewed signs of basis swaps moving a couple of ticks against the Euro’s favor later in the day. The 3-month EUR basis swap has widened back out to almost -104 bps. Thus was have unwound well over half of the move from the coordinated central bank intervention from mid-month that took the swap to -80 bps. Three-month forwards only closed lower than they are currently (at +5 ticks) on two days earlier this month, when EURUSD was initiall breaking down through the 200-day moving average. On the rate differential front, the market seems to be losing enthusiasm for projecting ECB policy accommodation, as the June 2012 Euribor is 20 ticks off its recent highs.

Chart: EURUSD
A promising candle pattern yesterday for the bears, but the squeeze was back on overnight and well into today as the German vote on the EFSF package approached and equities were flying. There are many conflicting fundamental and technical inputs here, meaning continued risk of short-term churning even as the bigger backdrop of a downtrend remains in place as long as the 200-day moving average stays in place, though the bulls might have a short term time in the sun if 1.3700 is taken out on the close. The rejection of the foray below 1.3500, meanwhile, keeps the pair somewhat neutralized until downside momentum picks back up, first with a close below yesterday’s and then below 1.3400.



US Data
Yet another revision to the ancient history of Q2 US growth data – which was revised +0.3% higher to an annualized rate of 1.3%, still perilously close to stall speed. “The acceleration in real GDP in Q2 primarily reflected a deceleration in imports, an upturn in federal spending, and an acceleration in nonresidential fixed investment that were partly offset by a deceleration in PCE, a downturn in private inventory investment and a deceleration in exports.” Wow – three cheers for growth via a deceleration of imports and more government spending!

The jobless claims data appeared very positive as the 391k reading was the lowest reading since April, though the seemingly good news was offset by the news that the data was likely skewed by “seasonal adjustment difficulties” as discussed in this Bloomberg article. Expect some amount of mean reversion in this data point next week.

Looking ahead
The Euro negatives are still in place, but the market seems to be having a hard time finding a catalyst for piling on to what appears to be rather heavy positioning. So the path of least resistance is difficult to determine in the short turn, particularly when the view is also warped by zanily swinging risk appetite –the US Nasdaq-100 futures have backed up as much as 40 points (slightly less than 2%) ahead of the US equity trading session, for example.

Elsewhere, the JPY crosses have certainly come to life as government bond yields have jumped off recent lows. Both the US 10-year and German Bunds are poised at the pivotal 2.00% level and have so far failed to close back above that level. Further yield rises (note again the endless irony of Operation Twist announcement seeing nothing but rising bond yields for the very bonds that the Fed will be buying under the $400 billion program) could be a catalyst for even USDJPY as rates have been on the move higher all along the US yield curve.

On the economic calendar, look out for the UK GfK consumer confidence data out tonight and the raft of Japanese data out in Asian hours (see list below) as well as the latest HSBC update of the September Manufacturing PMI.  Tomorrow we’ve got a Canada July GDP reading and US Chicago PMI, the last of the major surveys ahead of Monday’s ISM Manufacturing