The smell of burnt fingers wafts across Europe…

Are the euro shorts in pain? Remember, there were a lot of them.

According to The Street:

The extreme market positioning is not simply in the record short euro spec positions at the IMM (which is now more than twice the record short set in 2008), but also in the premium for euro puts over euro calls (three-month risk reversal closed a little above 3.25%), which is also a record high.

But there remain those who think the planned course of action is just another shorting opportunity.

From Barclays FX team:

We think that the measures are a positive for risky currencies. The liquidity measures along with the attempts to ring-fence not only the problems in Greece but also the other peripheral countries with elevated public debt levels, are likely to help ease the ease the strains in money and FX forward markets that were seen late last week. We are less convinced that these measures are a positive for the EUR/USD, however, and think that rallies in the EUR/USD alongside a general rally in risk would be an opportunity to establish fresh short positions, for several reasons:

1. To access the new facilities, countries would need to agree to fiscal consolidation measures, possibly reviewed by the IMF, and conditionality. New fiscal consolidation plans already are being announced by most peripheral governments. The acceleration of fiscal consolidation in what amounts to about 20% of the euro area economy means that the ECB will have to play a larger role in terms of keeping monetary policy loose for a longer period of time in order to help euro area countries grow out of their fiscal problems. This tight-fiscal/easy-monetary policy mix is likely to be negative for the EUR.

2. These new measures are further involving the rest of Europe in the peripheral countries’ debt problems; therefore, we do not rule out further political tensions in getting this programme approved.

3. ECB purchases of government and private debt runs the risk of being viewed by the market as further quantitative easing.

4. These initiatives are designed to only smooth the path of the significant structural adjustments that the euro area economy has to undergo in order to correct its current internal imbalances, it will not solve the problems. Peripheral countries have experienced significant losses in competitiveness due as their inflation outpaced inflation in countries within and outside the euro area. Therefore, they need real exchange rate depreciation and cannot rely on a . . . significantly lower EUR to achieve this. Instead, they will have to experience (potentially significant) deflation. They will also have to undertake some tough microeconomic reforms to improve their competitiveness.

We remain EUR bears and continue to forecast EUR/USD to head lower to 1.20 in the coming three months.

Guess you can’t keep a good bear wolf down.

http://ftalphaville.ft.com/blog/2010/05/10/224816/the-smell-of-burnt-fingers-wafts-across-europe/

 

the bounce in the EUR is very weak and there is no scramble to buy back positions.

Long term short on the Eur started establishing positions around 1.45-1.50.

There is currently no panic and I expect the Eur to finish lower tonight.