Today’s action a microcosm of the rest of the week?

Euro was up – then down, then up again and then down again. Could heavy positioning and heavy batch of event risks mean more of this kind of churn in markets for the rest of the week?

The weekend was bereft of real developments as the IMF and G20 meetings failed to add anything with meat on it after the impressive sounding, but vague statement last Thursday. Elsewhere, there were a number of rumors about a possible solution and countless commentators discussed a variety of scenarios and technical solutions to the Euro Zone’s current dilemma, but there is still so much uncertainty that it’s hard for the market to grab on to anything. Intraday today, the first news item that threw the Euro a bone was a less bad than expected IFO data point. Later, a further intraday squeeze in the Euro arrived after a “Euro region central bank official” indicating that the ECB is likely to restart covered bond purchases. This pushed EURUSD over 1.3500 for a time ahead of the US trading session. On a more Euro-bearish note, the official stated that interest rate cuts would likely be discussed, though they weren’t currently on the agenda. The usual risk indicators showed little sign of change, though sovereign debt spreads eased a bit lower.

Some have made the obvious, but important point worth repeating, that the IMF is relatively helpless because it can’t deliver the size of bailout necessary if a country like Italy needs assistance and we all know that this is a question of the Euro Zone working things out for itself.

Looking ahead
This week promises to be headline- and event-driven, with today’s EURUSD gap open higher, sell-off and rally a possibly microcosm of what the action may look like this week. It’s important to note that, at least based on evidence from the US futures market, speculators are already positioned heavily for Euro weakness, so it will be interesting to see if we get further churning rather than more decisive action as the week progresses, even on relatively Euro-negative developments. This would suggest the need for patience and waiting for favorable levels from which to express a view. The CFTC futures positioning report showed that, as of last Tuesday (when the Euro was still trading around 1.37 – the report is issued on Friday based on Tuesday’s data), speculative longs were at a record low going back at least five years.

Euro events this week:
There are a few key events this week related to the “new” (read: already long ago out of date) EFSF expansion from July 21, which has yet to be ratified. This includes Austrian and Slovenian parliamentary votes on the EFSF tomorrow, a Finnish parliamentary vote on Wednesday and the main focus, the German vote on the same on Thursday. We’ve also got Merkel in Athens tomorrow.

A Bloomberg article suggests that Bernanke’s bond buying will be challenged by Geithner’s bond selling as Geithner is looking to extend the US government debt’s duration – but wasn’t that perhaps at least some of the point? Bernanke has admonished the government not to reduce spending too quickly and here comes Operation Twist, the perfect Fed program for making it easier for the US government to issue longer term debt.

Chart: EURJPY
EURJPY looks like a mirror image of Bunds at the moment. Worth nothing today that bunds saw a chunky sell-off intraday today before EURJPY responded – could this be a further source of inefficient markets? Technically, it is interesting that we see a hammer pattern on the day thus far (though we should always wait for the close before judging the quality of a candlestick.). The direction in interest rates is obviously critical for the JPY and today’s action bears that out. We are increasingly curious what the JPY’s fate will be here as we look for a pivot in the interest rate cycle. Noting the EURJPY action today could be a bit premature, but history suggests that spikes lower in yields rarely last for a long time. From a positioning perspective, we’ve moved into the red zone as well here.