May 20, 2010

A Field Day For Contrarians Courtesy Of The Euro

Angela Merkel’s phone must have been ringing off the hook in the past 24 hours.  It is fair to assume that leaders from other Euro-zone countries, lobbyists and financial heavy weights did a bit of arm twisting after Germany’s limited ban on naked short sales of government bonds and bank equities was enacted yesterday.  That announcement not only angered European counterparts was seen as a further loss of confidence in European financial markets sending the Euro to a new four-year low.

Today saw an announcement of a different kind, reversing many short sellers’ fortunes. Reuters reported: Germany and France are to coordinate Euro support plans.

Germany and France have agreed to coordinate efforts to support the euro zone and the single currency and prepare for upcoming summits together, German Chancellor Angela Merkel said through a spokesman on Thursday.

This may be the first real signal that Europeans have become uncomfortable with the pace of the Euro decline. For short-term traders, it was a violent move to the upside which left many “naked” short sellers truly exposed.  A brief spell of profit taking among the faster acting currency traders propelled the Euro back up nearly three cents within just two hours.

EUR-2010-0520-5min

The contrarians have won the day but the Euro woes seem far from over.  Historically, Central Banks have had only limited success in talking up a currency.  Best example: The Federal Reserve and US Treasury.  Today’s short-term move just popped the Euro back into the medium-term trend channel.  That channel however is still pointing downward for now.

EUR-2010-0520

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