Is EUR looking to Grind Higher?

Looking at the price action that took place in the overnight session, one can only say that it was somewhat confusing and predominantly technical in nature. In early morning Asia, the single unit was making an assault on 1.29 and a few hours later, the EUR is contemplating taking on Friday's top tier prices. Even USD/JPY has decided to trade at new highs essentially on no fundamental news. It's Softbank and its M&A activity that is providing the myriad of reasons to favor a softer Yen. Without this potential takeover, the currency pair range bias implies that there is only value to be buying the dollar on dips against the Yen. In Europe, continued market worries around Spain and Greece have been capable of keeping global equities gains and the EUR trading somewhat muted to last weeks closing prices.

Chinese data was unable to garner any Asian equity enthusiasm. The country's trade surplus widened in September as imports rose +2.4% y/y, compared with a -2.6% fall in the previous month, suggesting that domestic demand is improving. Even the headline consumer inflation slowed to below +2% (+1.9%) last month, certainly giving the PBoC more room to boost their economy. Meanwhile, the PPI declined 3.6%, y/y in September, compared with the -3.5% fall in August, falling for the seventh straight month.

Since the US data calendar this week is packed with mostly second tier data, it is unlikely to significantly change many investors views on the state of the US economy as we head towards the homestretch of the Presidential election race. Most of this weeks true focus will be on the Euro area leaders' summit this coming Thursday and Friday. Many analysts expect the summit to yield few policy decisions. Top of the summit agenda will be the presentation of the interim report prepared by the European authorities to strengthen further the functioning of the euro-area. Do not expect market-sensitive issues, like the ESM to recapitalize banks directly, to be clearly clarified. Expect investor positioning to want to stay close to home until then.

The market continues to hazard a guess when Spain will seek aid. Suspicions remains that a bailout will be delayed due to regional elections on October 21 and November 25 or that Chancellor Merkel is looking to merge a Spanish bailout into one big crisis package that involves Cyprus and Greece. It seems that the Spanish themselves may be throwing a spanner into the works. Prudently and in its own best interest, Spain seems to be seeking a guarantee that when it requests a bailout the ECB will target a “risk premia” on Spain down to +200bps. To them, its a reasonable and acceptable level. Levels exceeding this would most likely lead to contractions in lending to corporations. If this request is true, then expect more debated questions about the OMT and the explicit and implicit yields to the OMT. Will the ECB be adverse to such a request? Would there not be grounds of inconsistency (Ireland and Portugal)?

So far we have witnessed choppy price action around the 21-DMA (1.2949) into a new week. Failed attempts to breach the 200-DMA (1.2823) is keeping the EUR bulls happy. The tech's who had initiated long positions around 1.2880 entered into earlier last week have managed to book reasonable profits in the overnight range. System buying has the EUR trading on top of its session highs trying to squeeze the day traders who are now short. Interbank now sees a high probability of a spike above the 1.2970-80 to flush out the weaker shorts. The top is expected when the first Central Bank sellers emerge. This rally above 1.29 has been fueled thus far by sovereigns.

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EUR Hanging Tough