Positions in Europe: Short EUR/USD (FXE); Long German Bonds (BUNL)
In the chart below we outline our trading levels on the EUR/USD as we head into the week. Our quantitative levels suggest that the cross is broken on the long term TAIL line and that if its immediate term TRADE support level of $1.29 breaks, the next level of support is $1.26. Currently the EUR/USD is at $1.2911.
This weekend was packed with noise. The Germans and French in particular continue to be at loggerheads on the timetable and terms of a banking union.
On a “single supervisory mechanism” of banks in the Eurozone, Germany remains reluctant to cede control of its banking sector. It wants the new regulator to concentrate only on the region's biggest banks, perhaps an estimated 20-25 banks. Specifically, Germany’s public-sector banks oppose regulation citing a lower-risk business model. The Germans are setting an expectation that an agreement may not come until next year. On the other hand, the French, in line with the European Commission (EC) positioning, want all banks in the Eurozone (~6,000) to be supervised by the ECB and are signaling that an agreement can be reached over a shorter time horizon than the Germans.
This indecision on a banking union was quickly met with rumors of the expansion of the ESM from €500 Billion to €2 Trillion, however without detail on how this expansion would be covered. The ESM is expected to come online on October 8th and we think the rumors reflect the market’s belief that the current size of the ESM is far insufficient to deal with the default and/or bailout needs of Italy and Spain, especially as the EFSF, the only remaining bailout facility (short of a blank check from the IMF), is nearly depleted if it is decided that funding for Spain’s €100 Billion bank recapitalization comes solely from it.
Below are a few calendar catalysts to note in the coming week that could influence the cross.
Wednesday (9/26)
Greece’s two biggest union have called a 24hr general strike to protest austerity.
Germany to sell 5 Billion of 10YR bonds.
Thursday (9/27)
Spain’s cabinet is expected to approve the 2013 budget.
Italy sells bonds.
Friday (9/28)
Spain will release results of stress test on banks (estimates between €60-100 Billion for bank recapitalizations).
France presents the country’s 2013 Budget.
Matthew Hedrick
Senior Analyst
