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What We Are Watching:
- EURUSD Shrugs Off Italian Worries
- Will Forex Traders Attack EURCHF Support Base
- EUR & GBP Correlation
A seperate post will be dedidicated to the SNB, so we’ll just go over the quick highlights. No change in the 1.2000 price floor. the SNB won’t tolerate any franc strength (like its really their choice), and the central bank is worried about the Swiss economy. Forex traders were focusing on the main words that the SNB wasn’t raising the price floor. On that not they quickly sold the EURCHF with it falling below 1.2010 after briefly flirting with 1.2020 before the meeting. It appears that we have a fight coming on with big money sellers willing to see how aggressive the SNB will be to hold the 1.2000 price floor. Our quick take as that the SNB won’t risk losing credibility and let it drop below 1.2000 for any extended period of time, although we could see a few brief moves below 1.2000 again.
On to the EURUSD. The big surprise in the Forex markets yesterday was the EURUSD’s climb. It took a little positive German data, sprinkled in with optimistic words from Italian Prime Minister Mario Monti, along with polls supporting the pro-bailout Greece parties, and the next thing we knew it was trading above 1.2600. Today though we saw a pullback with the pair hitting a low of 1.2542 on new worries about Italy’s banking system. This caused short term Italian debt yields to skyrocket and sent European equity prices lower.
However, since the morning, things have turned around again with the EURUSD trading again around 1.2600. What appears to be happening is that the Forex market is looking ahead to the weekend Greek vote. And as such, the huge short interest in the EURUSD could be triggering covering among sellers before we enter the weekend. SwiftTick has been skeptical of any Greece related rallies in the past (Sell the EURUSD on Greece strength) and we believe the current move may also be short lived. However, when these short squeezes come, they often have legs. As such, we would be wary at thi spoint of going short the EURUSD and would prefer to hold off until Monday.
EUR & GBP Correlation
More interesting to us is the way the GBPUSD sold off as the EURUSD rallied yesterday. We continue to beliee that the Pound is seeing interest of Euro holders as an alternative safe haven destination. The often strong correlation between Euro strenght and Pound weakness leads us to believe that this trade is only getting stronger. As such, we continue to favor shorting the EURGBP to take advantage of long term Euro weakness.
What a difference a day makes. After looking dead in the water, the EURUSD has sprung back into life. As mentioned above the pair is back around 1.2600. Looking ahead the the pair will need to pass yesterday’s high of 1.2615 to confirm that the current rally has legs. If it does, it may be worth taking a look at for the long side. On the other hand, failure to reach a new high could indicate that real buyers aren’t emerging yet, and the current strenght could vanish quickly on any negative EU news.