Markets Squeeze higher – but Germans reject pooled eurozone debt

June 15, 2012


You might be asking a question about how the Australian Dollar is back above parity after a night where Spanish yields hit just around 7% where Italy’s bond auction got sold but at substantially higher rates than just last month and only a couple of days before the Greek election.

Please don’t believe anyone who tells you that the Aussie Dollar is a safe haven because the Euro was higher as well and Greek equities have been on a tear in the last couple of days.

What happened is that markets got a bit excited after Reuters broke a story saying that the globes Central banks are getting ready to provide liquidity to the global financial system on Monday morning Australian time in the wake of the Greek Election and that the BOE also is putting in place some extra measures for the UK economy as well. The data flow from the US has also suggested that we might even get an announcement of QE3 at next week’s FOMC meeting.

Now all of this is good but it’s really just akin to calling in another few apparatus to help contain a fire that risks getting out control even though they know they probably can’t put out that same fire. Indeed i just watched a video from the BBC where the German Deputy Finance Minister gives an unequivocal no to Eurobonds.

German minister rejects plans to pool eurozone debt

Equally important in these market moves for the Euro, Aussie Dollar, Greek Equities and other markets  is positioning. I know that I have been talking about positioning a lot lately when I havent really touched on it much before. The reason for this is that it is one of the tools in my tactical trading tool kit and because its tactical it doesn’t always come out. but with market positioning at extreme levels, at least in the short-term speculative community it has become a much more important signal than is the case when positioning is more benign.

But in positioning we see the risks.

My guess is that the CFTC data that will be released tonight are likely to show a reduction in the speculative Aussie and Euro shorts after the rally of the past week – at least that is my guess. The question then becomes where to next?

For me the Aussie is sitting at a critical juncture 1.0026 is the 50% retracement level of the move from 1.0469 to 0.9582 which was the recent low. The Aussie sits just below that at present with 1.0130 the next key resistance level. If it gets through here then it is probably running into the 1.02’s maybe even higher.

But its a turkey shoot isn’t it – is the Aussie, Euro and other markets going to go up or down?

Who knows how the Greek election is going to go? We can, and do, hope that we get a positive outcome for Greece and the markets but the Greek people may still see these two things as incompatible. Indeed we could get another uncertain result which won’t help anyone.

For mine the recent round of moves have been about prudent position squaring into a huge event risk and that even though the Central Banks stand ready to provide liquidity and support markets the reality remains that the political and economic crisis aided by the fact that  the German’s continue to show they are playing a long game means that any relief rally will run into headwinds fairly quickly.

Can you trade the action over the weekend? Of course you can if you are of that mind – not for the faint hearted but at such a juncture you might just want to buy puts AND calls, buy AND sell puts or buy AND sell calls on your favourite markets and depending on your predilection toward what you think the outcome will be. I wouldn’t be trading spot though at the moment or leaving positions open over the weekend unless you really have a big risk tolerance and are prepared for the gaps that we could get early next week.

It possible nothing happens that would be a great outcome for markets, not for the traders with the options above though, but it seems highly unlikely that this is the result come 5am Monday when the Forex markets open for business once again.

Have a great day

Greg McKenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

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  1. - June 15, 2012

    $A above parity on Fed speculation…

    The Australian dollar has moved above parity on speculation the US central bank could bring in quantitative easing to boost growth.At 0700 AEST, the local unit was trading at 100.26 US cents, up from 99.48 cents yesterday.HiFX senior trader Stuart Ive …

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