Do EUR Shorts Feel Comfortable?

This last five cent EUR loss feels like an eternity. However, the market is beginning to feel that they have the single unit finally on one knee, one more and a tap out is all the bears require to justify these agonizing short positions. Euro policy makers, despite their differences, will be vocal to the end, if there happens to be one. This morning's economic calendar is only a sea of red, indicating that German manufacturing and Euro-zone services have done little to lighten the dark mood that is suffocating Europe this month, as the crisis in the region continues to take its toll.

To many observers, the EZ debt crisis is in its most dangerous phase, with price action across different asset classes indicating the growing realization that Greece's exit from the monetary union could be imminent. The mention of contingency plans by finance ministers yesterday has added increased political strain amongst the Euro members and has contributed to what seems the never ending EUR selling on rallies. Obviously, Bundesbank comments indicate that Greece was “jeopardizing the continuation of international aid payment and that the consequences of an exit would be significant but controllable” is justifying the current recycling of EUR shorts on top of its 22-month lows.

The policy makers themselves are having a difficult time to find firm footing. European leaders concluded yesterday's summit with few concrete steps to address the periphery crisis. They maintained the call on Greece to stick with the budget cuts and offered no immediate relief for Spain. The leaders agreed to give the EIB the mandate to draw up proposals for ‘growth' for next month's summit but disagreed over Euro bonds. It is rumored and widely reported that the Euro officials are stepping up contingency planning for a possible Greek exit from the euro zone, for some as early as the first weekend in June.

Bund yields have sank to new record low yields (10's to +1.35%) this morning, as signs of weakness in Germanys key manufacturing sector again spooked an already nervous market, whose leaders have failed to ease the main worries of this debt crisis. Data is showing that German manufacturing activity contracted faster than expected in May (45.0), while economic activity in the EZ came in below estimates. Obviously the inconclusive EU summit is sending investors by the hoards into the safety net of the bond market. Aiding the safe haven flight is German business confidence falling sharply, by more than estimated, especially after six consecutive rises (106.9 vs. 109.9).

Other regional data, also was not so rosy. It was officially confirmed that the UK economy has slid even deeper into recession in Q1. GDP shrank -0.3% for the first three months, -0.1% lower than previously estimated. This will pile additional pressure on authorities to do more to spur growth. Already this week the IMF told Prime Minister Cameron's government that they should slow its austerity program if the economy's prospects deteriorate. The proof is in the pudding it seems! Our supposed large red saviour, China, continues to spew out questionable data. Overnight, there was a further decline in HSBC PMI. The preliminary Chinese Manufacturing PMI fell to 48.7 in May, compared with a final reading of 49.3 in April. This marks the seventh straight month the index has been in contractionary territory. Already authorities have pledged to intensify the “fine-tuning” of policies following Prime Minister Wen's comments about supporting growth during the G8.

Even the questions about Greece's membership dominating and plaguing the market, and justifying shorting the region, do not seem to be upsetting the retail sector acquiring EUR's close to the 22-month lows. The position graphs indicate that the longs now number just under +57% and seem comfortable demanding the single currency near this years lows until proven wrong. In the big picture, shorts dominate play and are focused on triggering the Fibo-projected base close to 1.2220. The intraday trend continues to tick south looking to extend losses through yesterdays lows, the retail sector on the other hand, prefers holding and recycling targeting this weeks breakout points higher up.

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Safe to Sell the EUR in the Hole?