Euro clarity

While Macro Man was sceptical that the Italian referendum would deliver the sort of shank-a-thon that EUR and equity shorts were hoping for, even he was a little surprised by the vehemence of the squeeze in EUR/USD.  Clearly positioning was at work here, as was a classic "sell the fact" mentality after a widely-expected "crisis event" duly materialized.

So how now?  Clearly a decent chunk of euro shorts vacated the premises yesterday, and the future of European markets rests, to a degree, with the ECB.   Macro Man suspects that if Mario Draghi could somehow fast forward through this meeting, he would; after all, it is likely to be a tricky business to both extend the QE program while at the same time hinting at its eventual demise, all without upsetting markets.

Of course, the ECB has form in upsetting markets while delivering more easing; one need only hearken back to this time last year for a classic red-hot poker for euro shorts.  Now obviously, price action so far this week has made positioning less pernicious than it was last year, at least in FX.  One could argue that Schatz, on the other hand, are still priced to perfection, yielding -0.70% when the deposit rate is -0.40%.   Even there, however, the worm may be turning; the chart is suddenly looking rather toppy, and a rather substantial amount of put flies have gone through recently targeting the 111.90-111.80 area on the March future.

While EUR/USD looks somewhat muddled for the time being, the picture for EUR/JPY is starting to look quite interesting.  The weekly chart certainly looks to have formed a nice rounded base, and it's blown through a rather nice trendline resistance as well.

Although the Italian referendum result duly caused some angst over that country's banking sector, for the Eurozone as a whole the recent steepening of the yield curve has been an unmitigated boon.  The chart looks fairly similar to the EUR/JPY chart above; very quietly, the SX7E has put in a 35%-plus rally since its nadir over the summer.

The front end looking ropy, the currency looking a bit perky and the banking sector showing signs of life; if you didn't know any better you'd think there was the faint whiff of reflation in the air!  At this point gambling on Draghi to successfully walk the tightrope looks just like that: gambling.  Last week Macro Man took profits on his ED steepener vs ER flattener position, and he's glad he did.

While the heart may say to stay short Europe, the head (or at least the eyes) suggest the opposite.   When head and heart are out of sync, it's usually a good idea to go flat, which is what Macro Man has done.   That served him well over the weekend, and he feels happy going into the ECB with a clear head and a clear position sheet.