Any taxi driver could probably tell you why the euro is screwed, so that story is rapidly becoming less interesting.
(Though if any of you actually hear a taxi driver talking euros, please let us know.)
So, why might the euro stabilise and possibly rally?
Mike O’Rourke at BTIG lays out some potentially bullish facts — most notable is the fact that the anti-euro trade is getting ridiculously crowded.
This all sets up for a showdown this week. It is highly likely that policymakers on both sides of the Atlantic will want to drill home the point that they were serious about the package announced a week ago. If the ECB can continue to sustain the improvements in sovereign yields, the next battle ground will likely be the Euro currency. If stability is established there, it will also have a calming effect on other markets. Speculative short futures on the Euro have risen to record levels and are close to double the previous peak registered in 2008 (see chart 1). In addition, Euro speculator longs as a percentage of positions are essentially at all time lows and hedger longs are as a percentage of positions are at all time highs.
So, things will start by a stabilisation in the euro
Needless to say, such positioning within the market will likely provide opportunity for the currency to stabilise over the intermediate term in this low 1.20’s range. The Dollar index is approximately 60% weighted versus the Euro and is approaching notable resistance at the 88 level. Other indicators here in the U.S. are becoming constructive as a result of the global turmoil. The Vix jumped back above 30 on Friday and AAII Sentiment dropped to 50% bullish, which is the lowest reading in 7 weeks and 5th lowest reading of 2010. Lastly, the economic data continues to pull through. None of these indicators is a “bell-ringer”, but taken collectively, they should set the stage for stability to re-emerge this week.
As for an actual bull case, that comes from David Kotok at Cumberland Advisors, whose argument is basically that European leaders have already doing a lot, and will likely do more, having learned from our post-Bear Stearns, post-Lehman fiasco..
Our conversations with European policy makers this past week confirm that they are committed to the Eurozone and to the correction of the structural deficiencies that led to the Greek-induced crisis. Furthermore, they learned from the US housing-finance-induced global crisis. They are moving ahead rapidly with major efforts to create whatever liquidity is required to calm markets, while implementing changes to deal with management of the debt loads.
Add in the fact that the euro is now more reasonably priced — as opposed to the ridiculously overvalued $1.50 level — and exporters should begin to do better, meaning fundamental improvement.