EUR/USD fell over 200 pips last week as news broke about Greece’s failure to form a ruling coalition on 15th May. The news shocker also sent Spain’s 10-year bond yield to a five-month high of 6.5% and Italy’s 10-year bond yield to 6%, the highest since 30th January 2012.
This week, a quick check on the bond market reveals that the four countries in the “danger zone” – Greece, Portugal, Spain and Italy – display a widening yield spread versus the German 10-year bonds.
These figures stand at 27.6%, 10.87%, 4.88% and 4.52% respectively.
In the Credit Default Swap (CDS) market, iTraxx Europe index recorded a figure of 181.84 yesterday, surging 15% on a weekly basis and 25.44% on a monthly basis. This tells us that more and more traders are betting on an impending Greece default.
This week, European leaders will meet at an informal EU Summit to discuss crisis-fighting proposals for the Eurozone. The proposals include empowering the Eurozone’s €500 billion rescue fund to directly recapitalise faltering European banks and commonly backed Eurozone bonds.
A big topic that will draw blood from all leaders is still the debate on “Growth” vs “Austerity.” USA
President Obama and newly-elected French President Francois Hollande are vouching for more stimulus and asset purchases. This puts them in the “Growth” camp.
German Chancellor Angela Merkel on the other hand, is holding firm to her view on fiscal measures and prudent management. This puts her in the “Austerity” camp.
Amidst the gloomy backdrop, China provided some cause for cheer. Over the weekend, Chinese Premier Wen Jiabao pledged to focus more on bolstering growth in the world’s second-largest economy. This caused Asian stocks to rally on Monday, rising from a five-month low.
The news also added 0.2% to the MSCI Asia Pacific Index, and 0.6% to the S&P GSCI Index of 24 commodities.
Just over a week ago on 12th May, the Chinese government cut banks’ required reserves for the third time in six months following data that showed trade, industrial production and lending were below forecasts in April.
Although China’s pledge to boost growth is taken as a bullish sign by the markets, it is prudent for traders to keep their eye on the big picture.
That picture is primarily centred on the Eurozone. Hence, any temporary rally in the markets is in fact an opportunity for us to go short, rather than long.
Top News This Week
UK: Revised GDP q/q. Thursday, 24th May, 4.30pm. I expect figures to come in at -0.3% (previous figure was -0.2%).Trade Call
Short EUR/USD at 1.2745The massive downtrend on the EUR/USD from 1st May to 18th May saw the EUR/USD plunge over 600 pips, from a high of 1.3283 to a low of 1.2642.
The retracement at the start of this week is caused by two things: traders taking profit and the positive sentiment surrounding the upcoming EU Summit.
On the hourly chart, EUR/USD is currently trading in a range, with Resistance located at 1.2811 and Support located at 1.2642. Our bias is for to go short.
An entry is taken at 1.2745 with a stop loss of 75 pips, located a few pips above the level of Resistance. We will have two targets on this trade, exiting the first position at 1.2670 and the final position at 1.2595.
Entry Price = 1.2745
Stop Loss = 1.2820
1st Profit = 1.2670
2nd Profit = 1.2595
(Source: MarioSingh.com)
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