One of the biggest mistakes of the year has been in the forecast of the euro currency demise. Granted the market was dollar bearish at the beginning of the year, but the Greek sovereign problems changed sentiment to being strongly euro bearish. The huge change has caused many to predict a large overshoot for the euro on the downside before year-end. The momentum traders as well as the fundamentalists all lined up for the euro short in the second quarter.
A problem is that the US economy has not cooperated. Sluggish economic numbers and a negative forecast by the Fed has created another dollar sentiment switch. The euro has gained over 9 percent in one month since June 7th. At the same time the short euro positioning has moved to long as measured by the IMM net large speculative trader reports.
The EU has seemed to get the religion of austerity or at least a slowdown in government expansion. This German view has been positive for the euro at the same the US has been pushing more stimulus. Optimism on euro bank stress tests is another reason for the rally. The LOIS spreads have stabilized and have not moved to 2009 levels. The stable EU environment in the short-run even with lower growth expectations has stemmed the tide of euro selling. While moving to euro highs from 2009 is unlikely, the bearish view to the euro has reversed. We will need another negative catalyst to test new lows.
A problem is that the US economy has not cooperated. Sluggish economic numbers and a negative forecast by the Fed has created another dollar sentiment switch. The euro has gained over 9 percent in one month since June 7th. At the same time the short euro positioning has moved to long as measured by the IMM net large speculative trader reports.
The EU has seemed to get the religion of austerity or at least a slowdown in government expansion. This German view has been positive for the euro at the same the US has been pushing more stimulus. Optimism on euro bank stress tests is another reason for the rally. The LOIS spreads have stabilized and have not moved to 2009 levels. The stable EU environment in the short-run even with lower growth expectations has stemmed the tide of euro selling. While moving to euro highs from 2009 is unlikely, the bearish view to the euro has reversed. We will need another negative catalyst to test new lows.
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