Intraday Market Thoughts

Euro Slumps on Downgrade and Discord

by Ashraf Laidi
May 20, 2011 22:41

The euro lagged on Friday and closed near session lows after a Greek downgrade triggered a cascade of selling that was compounded by rhetoric suggesting a debt extension is off the table. The Canadian dollar had a soft tone on disappointing retail sales and lower inflation. CME speculative positioning showed euro longs pared by one third.

The single currency was assaulted from all sides as EUR/USD posted an outside reversal and fell more than 150 pips to 1.4155: 1) Fitch lowered Greeces rating to B+ and left it on negative watch. 2) The Bundesbank said current German GDP numbers considerably overstate the growth trend and will ease somewhat. 3) Norway suspended a $42 million grant to Greece because Greece did not live up to obligations 4)The ECBs Stark compared a debt extension to Lehmans collapse 5) Lagarde expressed frustration at Greeces inability to cut its deficit 6) Spain is holding weekend regional elections with the ruling socialists expected to lose 7) The ECB looks like its heading to the sidelines.

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The Swiss franc was the top performer as European investors looked for a safe haven and economic minister Schneider-Ammann urged the country to learn to live with a strong CHF. The second-best performer was NZD (these were also the two best performers on the week). The S&P 500 declined 0.8% and was lower for the third consecutive week. Copper flashed some optimistic signals on worldwide growth as it gained 1.3%; the weekly copper chart is beginning to look constructive after a 38.2% fall from the June-Jan rally.

Canadian retail sales were flat in March compared to the +0.9% consensus. Sales were flat for the quarter, suggesting that higher housing costs are biting into spending. Earlier CPI data was also soft, suggesting the BOC will be on the sidelines through the summer.

Weekly CFTC speculative positioning data showed that euro longs remain the largest-held position but that the net long was cut by 33% to 41.6K. Meanwhile, the overall net short USD position was pared back by 27%. The commodity block remains in a strongly net long position but it was scaled back for the second week. The net GBP position shifted to short from long and GBP is the only currency held short against USD. Positioning in JPY and CHF was relatively unchanged. All data shows positioning through Tuesday.

by AB -


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