From the September 01, 2012 issue of Futures Magazine • Subscribe!

All eyes on euro’s slow-motion train wreck

Floyd notes that the S&P 500 and the euro usually are correlated tightly, but that correlation now is weakening (see “Decline of the euro,” below). “The S&Ps may rally five handles, but we’re lucky to get a fraction of that move higher in the euro. That is a key sign from a relative strength standpoint that the euro still is under a lot of pressure. We would not be buyers — in fact, we’ll be looking to sell the rally,” he says. 

Floyd says the reason for a tentative downside is that the market doesn’t know what is going to unfold in Italy or Spain. “We have a pretty good indication of what they are facing vis-à-vis what we saw in Greece but simply on a larger scale. As those yields continue to rise in Spain and Italy, they cannot finance at those levels. It’s simply not possible. So, what we have is a foregone conclusion that there are going to be issues.”

Dean Popplewell, senior currency analyst for Oanda Corp., says the euro is in a downward leg. “The intraday charts seem to be convincing most technical analysts that there certainly is scope for further weakness.” He notes that many are looking to re-establish single unit shorts on upticks.

“This has been an ongoing play for quite some time. One of the most difficult parts out of all of this is how short the market actually is. It’s very much a one-directional play, and we currently are seeing record shorts,” Popplewell says. 

He adds, “We’re not seeing proactive measures by the policy makers in Europe. They seem to be relying more on rhetoric. It is this rhetoric that is providing these short inter-day blips in the currency itself.” 

Popplewell notes that Spanish yields are close to euro-era highs suggest unsustainable financing levels that put Spain in danger of requiring a formal bailout. Fears of provinces declaring bankruptcy also are behind the suggested floating of a financial bailout from the European Union and International Monetary Fund (IMF), he says.

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