After a month of scary news out of Europe, traders and economists are becoming convinced that the effects of the crisis on the euro in the short-term are fading—for now.Traders and fixed income strategists consulted by Business Insider are starting to point for support for the euro and reevaluation of the immediacy of a threat from Greece as leading to support for a more risk-off attitude.
“The euro is oversold, the dollar is overbought, and that’s because people view the negotiations [about Greece] as unsettling,” Lawrence McDonald, the senior Vice President of Corporate Credit Sales at Newedge said in a phone interview last week. “But at the end of the day, you’re not dealing with an actual government until the 10th or the 17th [of June] so that’s when you could get a real possibility of a Greece exit.”
Various currency strategists also noted that a lack of new developments in the euro crisis are setting up a rally in the euro-dollar trade, predicting that the currency could rally about 100 to 200 points, coming to rest around $1.28 but above recent trading levels of just above $1.26.
“Our positioning data suggests long USD is overstretched, also indicating euro might not have much room to the downside,” a trader at a major New York-based investment bank confided to Business Insider. Other traders said they began buying euros and shorting the dollar earlier in the week, though have so far had difficulty in maintaining this position.
A handful of headlines Friday appeared to confirm some return to risk in the currency and fixed income markets, despite ongoing long-term concerns. Declines in yields on Spanish and Italian bonds, reports that SYRIZA may be losing traction, and a rally in European equities all suggest that risk may be back on.
That said, investors and strategists resoundingly agree that this optimism is short-lived. “The crisis in the euro zone is still likely to get worse before it gets better and so any pause in the selling pressure is likely to be temporary,” wrote Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, in a note yesterday.
Further, any indication that Greeks may be leaning towards a more pro-bailout stance may be premature. “It is too early to say that SYRIZA has lost the momentum for good. The election campaign has not started yet and the last elections showed that the last 7-10 days ahead of polling days were crucial for determining the final outcome,” Dr. Wolfango Piccolo, Practice Head of the European strategy division at the Eurasia Group, said in an email.
The biggest events to watch? Debt auctions in Spain, Germany, Belgium and the Netherlands this week, which—if poor—could halt any temporary correction.
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