The bull run in the euro from a low of 1.1875 on June 7th to a high of 1.3332 on Aug. 6 had very little interference as the Euroland news was generally favorable and the US economic news was not.  Providing assistance for the advance was the speculator, a massive short, who was there to buy every day.   The market had already discounted the bad news, the reduction of US second quarter GDP growth to 1%, by the time the surveys were released.  Further, by the middle of last week, the spec had reduced his net position to less than 4% of the total futures open interest.

The attitude change in the euro valuation began when concern about the sovereign debt difficulties emerged first in Greece. The cost of running a bloated and inefficient Greek government where yearly expenses were far in excess of revenues, resulted in massive issuance of debt  every year.  Roll over of the debt became more difficult and the rate on some of this paper, at over 15%, was high enough to make a loan shark proud. 

Over the objections of the Germans, the Euro Central Bank committed €750B to assist banks to make a market for the high risk loans.  This commitment, to assist the lending nations, worked and the Euro Central Bankers, successfully defended the value and the future of the one currency.  This also came at a period when the Chinese were diversifying some of their currency reserves away from the USD.  In a Bloomberg story this morning:

"China Favors Euro Over Dollar as Bernanke Alters Path"

they reported..."The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2....Diversification should be a basic principle,” Yu said in an interview, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets, instead we bought quite a lot.”

Late last week the Euro debt market started to focus again on sovereign debt risk.  While the US was busy peddling billions of new 10 and 30 year paper, the Italians were having difficulty selling their short term notes. In Ireland the sale of same  €500M 6 and 8 month bills commanded a hefty 2.81%.  Tomorrow Ireland  is auctioning €1.6B 4 and 10 year notes.  Traders will be watching how this auction goes.  A disappointing auction may weigh heavily on the euro,  and may crowd out private banks who also need to issue some debt.  

Our preference is the short side of the euro but we are fearful making a sale after the recent 500 pip sell off so we are going to watch, hopeful that we can establishing a short above the 1.29 level.

Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.