Still Much Momentum in the Long EUR/USD, but ...

Will it last and for how long? This indeed seems to be the question to answer at the moment in global financial markets but one thing remains sure for now which is that traders and other market participants still seem very keen to burn off their greenbacks. From the point of view of macroeconomic fundamentals and whether you believe in de-coupling or not this does not seem to be classic case of de-coupling in the sense that investors are playing on an asymmetric data flow; rather I would say that they are playing expectations on interest differentials. In this light the news from both the Eurozone and the US is pretty dim at the moment. True, durable goods orders declined in the US by a hefty 4.9% in August but if we look towards the Eurozone the recent flow of data is also exclusively on the negative side. Edward dishes up the relevant data on Bonobo Land. In Germany, both business and consumer confidence fell and in also in Italy where business confidence nudged down. Finally, regarding the real economy we saw that industrial orders declined by 4%; do note the fact though that this reading is from July. Also, please don't miss the recent downward revision of Italian growth rates which subsequently as well as of course inevitably is sure to bring back the spectre epitomized in the debt-to-GDP ratio; quote Bloomberg:

The Italian government cut its forecast for economic growth next year and said increased public spending will contribute to a higher debt than previously predicted.

The $1.8 trillion economy will expand between 1.3 percent and 1.6 percent next year, less than July's outlook of 1.9 percent, Finance Minister Tommaso Padoa-Schioppa said during a parliamentary hearing in Rome today. Italy's debt will rise to 103.5 percent of gross domestic product next year, up from a previous forecast of 103.2 percent. The government predicts debt of 105.1 percent this year, the highest in the European Union.

Italy's economic expansion has been driven by growth in the European Union that has fueled exports and boosted confidence. The European Commission on Sept. 11 cut its forecast for EU growth this year as the collapse of the U.S. subprime mortgage market boosted the cost of credit and threatened to choke growth.

``We're following this day by day,'' Padoa-Schioppa said. ``It could very well be that the effect is worse than what we think now. So far the news on Italian banks is reassuring. This does not mean it won't affect the Italian economy and this has already been, in part, taken into account.''

Psst, don't tell S&P and her friends ;).

Meanwhile, all this rumbling on the Euro is of course set somehow or the other to shore up in Frankfurt at the ECB as I have also tried to explain in recent posts. On that note and as Edward also notes on a finishing remark (see link above) Trichet seems to be awfully quiet at the moment which perhaps should be seen as an indication, if any, that he is considering his options. Meanwhile however, a couple of Trichet's fellow knights around the round table in Frankfurt don't seem to have read the ABC of coherent board/management communication (does such a thing in fact exist?). Consequently, Greek council member Nicholas Garganas went out of his way to ensure that he for one does not have any problems at all with the perky Euro and that in fact inflation pressures remained well present in the economy. Now, I really do need to treat this in greater detail at some point but for now let me say this. I can understand and see the risk of mounting inflation pressures from structural forces (food, commodities, energy) and capacity utilisation but it must be remembered that none of this seems to be directly tied to booming economic activity now does it? Also, when will people realize the importance of differentials in short-term interest differentials and how this tend to actually bring in more money and thus more liquidity. So, that was Garganas who by the way also assured us that the current ECB policy stance is still on the accommodative side. Hardly however had Garganas' comments trickled down through the market streamers before Irish council member Guy Quaden made a statement which can only be interpreted in the direction that the ECB actually is looking at the Euro's upward tendencies. So, enough of this already I guess. I want my readers to know that I am not saying any of this is easy but we need to realize two things. Firstly, and this is of course a simple fact, Bernanke was the first one to fire his shot in all this and now, whatever the ECB thinks it should or should not be looking at, the ball is in Frankfurt's court and although of course you can think before you play, events are moving in such a way to make time a rather scarce resource. Secondly, if we were really witnessing de-coupling all this would make perfectly sense but the fact is that we are not which only further substantiates the general unsustainability of the situation. At the end of the day however this is all very normative of course and turning to more objective analysis I still see some room for a play on the long EUR/USD. It all depends on how long we expect the ECB to wait and of course just how negative the data will be from the Eurozone. Clearly, I don't see a raise from the ECB in the rest of 2007 and in this light Garganas is going to eat his words, I have no doubt on that. The damn thing is that the longer the ECB waits the higher is the probability that Italy falls into a recession as well as those currency pegs and of course the floaters in Eastern Europe will see a hard landing which would also bring Germany down a considerable notch. So, this is a question of just how big the ECB assesses the downsides from all this and so far with Trichet muted and his underlings running around in different directions your guess is as good as mine.

So, given the fact that I have pretty much defaulted on the future short-term course of the EUR/USD in terms of trading tips it is always a good idea to refer to people smarter than yourself. As such, Macro Man's recent post should provide you with some good inspiration as regards to how you want to play the next couple of days. Moreover, DailyFX is always a nice place to stop by if you are in need for inspiration; here are their two recent notes on the topic in question. As a very final word and now that we are in FX trading land you might also want to watch out the slew of data releases from Japan which is due out on Friday. My guess is that the consensus' expectations are a bit too optimistic which then means that there should be room to play on some Yen weakness if you have the stomach for it of course.

In any case, best of luck!

Eurozone watchclaus vistesen