The EURUSD currency pair hit a high for the year yesterday. This is not a bad performance for the Single Currency, which was touted as a candidate for parity with the US dollar not so long ago.
remaining in the Euro zone and / or the EU itself seem to have receded into the
dim, distant past. Even a snap Greek general election, the third this year, has
done nothing to dampen the rise and rise of the Euro. And, let’s face it, if it
were not for the publicity surrounding the recent Greek / EU / IMF
negotiations, who outside of that country, and a handful of political pundits,
would have known who was in power there, and for how long their government
Main driver is short covering of speculative positions
While a rush to the safety of a currency that has proven its resilience over and over is one factor in the rise of the Euro, caused by yesterday’s rout on the equity markets, it would not be good for Euro bulls to get too complacent. The forces that will propel the Single Currency to the downside are still in place. Deflation fears, which will almost certainly be met with more Quantitative Easing on the part of the ECB (just as soon as Senor Draghi and his colleagues are back from their hols) are still very strong and will ensure that the downward tendency remains extant.
The market has come to the conclusion that interest rate rises in the
are placed somewhat on the back
burner, due to the dovish (confused?) nature of the most recent FOMC meeting
minutes to be released. But even this assessment may turn out to be incorrect. US
In the meantime all those hedge funds that had placed massive bets on an early start to rate rises in the
are forced, for now and as a bye-product of the turmoil in Chinese equities, to
unwind those wagers. The same institutions had created a very sizable imbalance
to the short side in the Commitment of Traders (COT – see illustration above)
figures, which are a measure of the positions that are taken on, both long and
short. It is the covering of these short positions that is propelling the
current rise in the currency (covering a short position involves the purchase
of the underlying asset, which gives rise to upward pressure on the price or,
in this case, the exchange rate for EURUSD) US
It may not last.