By: Christopher Lewis
Looking at the recent action in the Forex markets, it is easy to get “blinded” to the most opportune trading set ups as there is simply so much focus on Europe at the moment. The EUR/USD pair is the most liquid trading instrument on earth, and a favorite amongst traders. The pair normally has a very steady gait to it, and as such is often the one traders start out with.
With the current issues in the European bond markets, it is easy to think the Euro should be melting down. After all, the Spanish 3 month notes doubled in their yield from just a month ago on Tuesday. The Italian 10 year bonds are well above 6%, and only buying by the ECB has been able to keep a cap on them.
In the middle of all of this European mayhem, the EUR/USD has traded lower, but only marginally so. The pair seems to be attracting the attention of buyers every time it gets near the 1.3450 area, and as a result is frustrating many of the market players. It simply does not want to fall below that area. There are various rumors in the market about central banks from Asia buying the Euro at these levels and the Fed certainly would have no issue stepping in and stopping the ascent of the US dollar either. These are just rumors, but it does seem very suspicious that this level has become so solid in the face of such deteriorating conditions in Europe.
Another possibility focuses on French banks. Although there are certainly other nationalities involved, there is a lot of talk about French banks trying to raise capital by selling assets. A lot of these assets are dollar-denominated, and have to be converted back into Euros if the banks want to shore up their balance sheets. This would make sense to a point as it would certainly have the flow of money heading back to Europe. Another reason it may not be falling so much is that a lot of these assets are also Euro-denominated. This means that in order to close them out – there is no conversion, and therefore doesn’t have an effect on the EUR/USD pair.
No matter the cause of this buoyancy, the EUR/USD seems to be finding a lot of footing in this area. Because of this, the Euro has been very difficult to trade. You can’t really short it here, and you certainly don’t want to own it. Someone out there has effectively killed this market for the time being. However, watch the commodity currencies – they seem to have no issue falling.