Euro on the Verge of Another Massive Bear Leg as Crisis Fears Return

Fundamental Forecast for the Euro: Neutral

• Spain bond auction nearly fails following announcement of harsh budget cuts
• ECB holds rates, maintains its cautiously hawkish outlook
• Will EURUSD be swept up by a larger dollar recovery?

Fundamental Forecast for the Euro: Neutral

The euro took a painful tumble this past week against all of its major counterparts (even the ones with central bank-backed floors). The skeptical could chalk this up to natural ebb and flow as it is too early to label any specific pair as tipping into a clear euro-bear trend and the over-anxious have suffered false starts before. However, what significantly elevates the risk / opportunity of a major drive this time around is the fundamental pressure building behind the currency this time around. Not only are the risk winds picking up, but we are finding a serious return of crisis fears for the Euro Zone’s still sensitive periphery. And, this time, the fear of crisis is spreading more efficiently to larger and therefore more critical members.

It wasn’t too long ago that Greece was the top concern. We certainly shouldn’t write the country out of the fundamental picture for good; but when there is a critical decision that must be made on immediate risk trends, the something that is a problem later down the line can easily be ignored. We’ve seen this happen many times before with the euro – and with Greece specifically. With the market already talking about the possible need for a third rescue program as the optimistic forecasts for a return to growth fade, it is only a matter of time before this conversation returns.

In the meantime, we have new players at the forefront. And, these Euro Zone members are far more concerning. Since early 2010 when Greece received its first bailout, policy officials have consistently assured the market that this was a ‘unique situation’ and ‘one off’. This guarantee has survived two additional bailout programs for Ireland and Portugal, so it seems ludicrous that the further accommodations and restructuring that Greece drew are off limits. When looking for future threats, it is often best to look at those that have already fallen on hard times in the recent past. Ireland and Portugal are easy targets given their first round rescues.

Ireland recently won a postponement on repaying the promissory note used to bailout its banking system. The market didn’t see too much harm in this move, but this was a clear test of the EU’s rigidity with keeping the favorable terms to Greece’s ‘unique’ situation. More dangerous is the building speculation that Portugal will need another bailout of its own. Even EU officials and the IMF see a good chance that the country will need a ‘bridge’ when it returns to the market in 2013. If the euro is under fire for its financial health, these concerns will quickly turn into active selling points.

More of a risk of turning into an active selling catalyst in its own right is Spain’s financial struggles. Over the past weeks, the Spanish Prime Minister rebuffed EU officials’ 4.4 percent deficit target for 2012 (expanding it to 5.3 percent instead), the country introduced severe budget cuts, the banking sector has come under greater scrutiny for its consolidation and real estate asset evaluation, and officials have said outright that the country was facing “extremely difficult” conditions moving forward. The possibility that this either is a warning of further deviation from requirements or a lead into a bailout request is high.

Aside from the return to surfing the financial headlines for the latest news of the regional financial crisis, euro traders should also keep a close eye on the general balance of risk appetite. For the euro itself, the ECB has kept its modestly hawkish bearing, but the past rate decision has shown that this doesn’t precede a quick return to hikes – merely a slower reaction to further stimulus needs (a risk in itself). Bigger picture, sentiment trends in the capital markets are coming under visible duress. If the broader markets are unwinding riskier exposure, the euro will certainly be cast in an unfavorable light. - JK 

OpenBook’s Gold Bulls Anticipate the Return of $1800

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February 7th, 4:18 pm
Friday’s unexpectedly improved U.S. labor data helped to bring about a strong rebound in gold prices. Gold traders took advantage of an earlier 2% price drop – the largest single day decline in a month – to buy into gold bullion which gained 0.6% earlier in the Asian session, and was trading at $1,736 per ounce. On the OpenBook, long positions outnumber shorts by a ratio of more than 4-to-1.
Over the past 24-hours, trader javiviveloz has closed out more than a dozen positions in gold, both longs and shorts with an average return of more than 6% and some as 9.97%.  This trader, who has 437 followers and 87 copiers, trades only in commodities. He allocates 81.8% of his portfolio to gold and the remainder to silver and currently has several long gold positions open, which would not need too big a rally to see gains. Over the past 3-months, this trader has seen his P&L rise 62.7%, and would be a good choice for those OpenBook traders who are considering branching away from currencies.
Uncertainty over the Greek situation, specifically, and the Eurozone, in general, is likely to continue to support gold prices. Analysts say that the uncertainty is likely to compel the majority of the world’s central banks to maintain a more accommodative monetary policy. While the likelihood of any additional quantitative easing from the U.S. is less likely now given the labor data, the outlook remains supportive of gold prices in light of the Fed’s commitment to low-interest rates for an extended time.
OpenBook trader XenderX expects that gold prices will likely hit $1800 before the trading day ends, and has opened up two long positions in anticipation. This primarily high-risk trader is on the verge of returning a 474% profit for the last six months, and allocates 36.5% of his portfolio to gold with another 17% to silver; the allocation has returned 16.8% and 18.8%, respectively, over the last quarter.