Eurostriches

Back in mid-May we were concerned that the Europarity Knights were getting a little over-excited and that the pathetic little bunny of the Euro, up for the slaughter, may put up more of a fight. And indeed since then the harmless Euro Bunny has beheaded a number EUR/USD short knights and it feels as though many more have run away. Both in FX and also in periphery spreads.


What is remarkable though, is the European Policy that has resulted in such a turn around, appears to be little more than the Timmy G's inspired "Shut the Fuck Up". And believe it or not, it is actually working. What is more remarkable still is that they have been able to keep it up for so long. This Bunny is more like an ostrich. It’s as though this policy of burying your head in the sand has resulted not only with the Eurostriches ignoring where they are, but also with the market predators on their tails suddenly losing sight of them too, responding with a "Huh, where did they go? " and charging off chasing a weak US and limping China instead.

But how long can Europe hold its breath for? With a market much more balanced now in its perceptions of relative risks between US, the East and Europe, the Eurostriches may feel it safe to surface again. And if they do they may well find a confused market willing to take up the chase again having lightened their previous positions. So lets have a look and see if there is anything to tweak the nostrils of the predators...

First off, we have the bank stress tests which appear to involve seeing if they can take the stress of a feather laid gently across their backs and have as much validity in the real world as the UK educational qualifications. Or maybe they do turn out to be credible, but with far worse results than anyone was expecting. Team Macro Man cannot imagine the market taking headlines like " to take EUR30bn writedown on sovereign debt holdings, will receive capital injection from Soffin" or "S&P downgrades Deutche Bank to A-" particularly well.

Second, Thursday's ECB press conference has the potential to throw a tape bomb - Monsieur Trichet has never been particularly good at communicating. With the press having whipped itself in something of a frenzy with respect to the ECB's LTRO/MRO, term deposit auctions and sovereign purchase plan, TMM would not be suprised if there were some misunderstanding that led the market to believe that either (i) the ECB is about to sell its EGBs, (ii) that it might be about to cut rates, or (iii) that it is about to embark on QE (because, of course, they're not *really* doing it are they...).

Third, while Europe's economic data has thus far held up (in sharp contrast to that of the US), this morning's weak German factory orders perhaps provides a hint of tomorrow's Industrial Production number. Team Macro Man wonders how long it might be before they see the Bloomberg headline "German Current Account posts deficit for the first time since 2003".

And it looks like the market is about to grab Spain by the Cajas...