Charts: Taking their Cue from the EUR

Markets have been moving on one thing and one thing alone which is the European sovereign debt crisis. There was quite a bit of volatility in the markets this morning, caused largely by the shifting sentiment in the financial markets. Interestingly enough, everything (Dow futures, EUR/USD and Greek CDS spreads) moved at the same time. The first chart shows intraday swings in Dow futures and the EUR/USD while the second chart shows the intraday volatility in Greek CDS spreads. Don’t expect this relationship to change anytime soon as investors in all markets take their cue from the euro

How EUR Could React to Irish Bailout

A great deal of discussion has been had about whether or not Ireland needs a bailout. However as currency traders, what is important to us is how the euro could react if the speculation becomes reality and history can be particularly useful for this purpose.

Greece received a record breaking bailout the weekend of May 2nd . On the first trading day after the bailout announcement was made, the EUR/USD plunged 100 pips which is not that significant but over the course of that week, it fell as much as much as 750 pips. Between May 3rd (the Monday after the announcement) and June 7th , the EUR/USD fell approximately 10 percent. However, as sovereign debt worries receded and Greece faded from the minds of global investors, the EUR/USD stabilized and began a risk assumption rally that brought the currency pair from 1.20 to 1.42. This means there is first panic and then stability.

Best Reason to Buy Euros?

The best reason to buy euros is because this man likes ’em! Premier Wen Jiabao, the leader of China said last night that China and Western Countries should work together to enhance the world’s confidence in the euro and the European Union’s economy. China will be working directly with Spain on this initiative as Wen invited Chinese investors to invest in Spain’s financial, renewable resources and electric cars industries, the report said.

According to the WSJ, Wen has made similar comments earlier this year on the euro’s importance, such as in mid-July when he met German Chancellor Angela Merkel he said Europe remains a key market for China’s foreign-reserve investment. China has said it aims to make better return on its vast holding of foreign-exchange reserves and ensure safety of its investment of the foreign-exchange assets.

Why is the Euro Rallying?

The euro has come along way since the end of June when it was trading below 1.20. Here are a few reasons why the EUR/USD has rallied:

1. Investors are Growing Less Nervous about the PIIGS – Credit Default Spreads are narrowing

2. Weaker U.S. data has turned the market’s focus to problems in the U.S.

3. Strong dollar in Q2 puts the risk of weaker earnings reports – U.S. earnings season begins next week

4. Major Short Squeeze – IMM data shows that as of last Tuesday, there are still ALOT of short EUR/USD positions

5. Sufficient Demand for Spanish bonds

6. No Major Funding Disaster after the maturity of the ECB’s 1 year lending facility

7. ECB not expected to make any major announcements before Stress Test results

8. Market expects the ECB to announce stress test methodology