Euro Bounces

The main feature today is the euro's strong recovery after falling through the 200-day moving average yesterday and Moody's cutting the Irish rating to below investment grade.  Today is a new day.  The combination of stronger than expected Chinese data, which eases fears of a hard landing,  ongoing talk that the the ECB is buying sovereign bonds for the second day in a row (won't be confirmed/refuted until early next week) and weak euro shorts has lifted the euro from the $1.3950 area seen in Asia to a little above $1.41 in the European morning.

There is an hourly trend line in the euro off the low from yesterday and Asian lows today comes in at around 8:00 EST at about $1.4030 and rising about 10 ticks an hour.   A break of this trend line would suggest the correction has run its course. 

Retracement objectives and technicals warns of potential toward $1.4140-60.  However, given the unresolved nature of the debt crisis, the risk is that the euro stops shy of technical resistance levels as participants sell into rallies more aggressively than buying dips. 

Spanish and Italian bonds are higher and their respective CDS are lower.  However, Irish, Portuguese and Greek bonds are lower. 

Following the Moody's cut of Ireland's credit rating the yen took off.  The dollar slumped to JPY78.50 in that twilight time zone after NY closes but before Asia truly opens.  The greenback quickly snapped back in Asia, but has been has met new selling in the JPY79.50 area.  Intervention still seems like a low risk scenario.   Volatility has risen over the last couple of days, but straddling the 10% level is not particularly high.  And the cause seems to be the European debt crisis, not a Japanese event.  Speculative positions at the IMM do not appear very large.    The risk reversals favor yen calls over yen puts by about 1.3%, which is the upper end of the 3-4 month range, but still well below 2.5% area that prevailed before the March intervention.  
Euro Bounces Euro Bounces Reviewed by Marc Chandler on July 13, 2011 Rating: 5
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