EURUSD Falls Back Under 1.2582 To Set Another Lower Daily Closing Level For 2012

• EURUSD trades higher as EURCHF spikes but both moves eventually peter out
• EURUSD falls back under 1.2582 to set another lower daily closing level for 2012
• Gold falls back as USD rises and rumours abound in late US trading of Greek exit being imminent
• European equity markets open higher as bond spreads contract and the EURUSD lifts once more off the lows in early trading
• EURGBP breaks above the 0.8025 resistance as EURUSD moves back towards 1.2600 handle
• JPY crosses all move to the right hand side as the Japanese currency weakens across the board on better risk environment this morning- EURJPY trades back above 100.25

Yesterday the EURUSD did lift to touch 1.2620 but was only up there for a heartbeat as EURCHF lifted sharply to reach around 1.2075 – more on that in a minute. The subsequent move back down to test the lows in late US trading once again failed to breach the 1.25 handle despite significant late selling in the US market.

This morning the price has lifted again as European equities rise on the opening and risk comes back on. That has helped the USDJPY higher overnight and seen all the JPY crosses weaken as Gold and the commodity currencies rise. The better risk environment has therefore helped the likes of EURJPY and GBPJPY rise as Gold trades back above 1560.

However as we have seen in recent sessions this more benign environment can soon change and overall the prognosis for the single currency remains bleak. Overall the fate of all the risk linked currency pairings are still very much hostage to what moves play out in the equity markets.

There is talk of a large barrier still guarding the downside on the EURUSD at 1.25 but I do also understand that even larger stops are now building underneath that level. There were a lot of rumours passing around the late US market yesterday that a Greek exit is now a done deal and that may occur as early as this weekend. Now of course I cannot confirm that at all and it must be remembered that this market is rife with rumours each and every day with many of those built on nothing more than conjecture with hard facts being scarce on the ground.

Despite the move higher yesterday the EURUSD did slip back to close at a lower level again yesterday continuing its recent run of lower 10pm closing levels. Today that would require a closing level now underneath yesterday’s lowest closing level of the year which was at 1.2532. So with the current price around 1.2575 there is the potential for a possible outside day reversal if the close tonight is above that level finishing level yesterday. That wouldn’t perhaps be as significant as yesterday’s closing level had it managed to end the session above 1.2582 as it was from a fresh low for the year at 1.2514. The low overnight has been 1.2517. There is also talk of an option expiry today at 1.2600 for the 3pm cut.

There is very little in the way of data out today, with virtually no releases from the European arena and the only significant release anywhere being the US University of Michigan confidence survey at 2.55pm. The US will be closed on Monday for Memorial Day holidays and that could keep the US participants on the sidelines later this afternoon as they seek to make a long weekend of it.

There is a lot of talk surrounding the use by the ECB of their ELA- Emergency Liquidity Assistance Program. According to those rumours there are considerable stresses playing out in that program, but ascertaining just how bad the situation is in regards to Greek and Spanish bank funding is almost impossible because the ECB keeps the details very much to themselves- more on this as when further information comes to light.

EURGBP continues to try and probe above the 0.8025-30 region but so far that level has continued to cap any further upside even at times when the EURUSD lifts sharply during the course of any particular session. Overall the demand for GBP versus the EUR still seems intact notwithstanding the current weakness of the UK economy as witnessed by yesterday’s further downward revision to Q1 GDP, which came in lower than the initial estimate at -0.3% for the quarter.

Yesterday the EURCHF lifted sharply as considerable buying saw a sharp spike in the pairing to around 1.2075 before it ran out of steam and the price gradually slipped back all the way to the 1.2010-15 level where it spent most of the evening before another smaller spike saw a move to around 1.2040 overnight. There was talk that 3 or more major banks were the buyers in the EURCHF yesterday. Now although not confirmed I would suggest that those banks were acting as proxy’s for the SNB-Let me explain.

Recently it appears that the SNB has had issues on the major bank portals because of line issues with counterparties that it has no credit lines for in order to enact trades on the main interbank platform- the EBS system. (stands for electronic broking system). Now all the banks mentioned buying EURCHF were rated AAA or near as damn it. Now if they are using them to transact their business then it would make sense that they underwrite whatever those banks buy on their behalf at 1.2000 and allow them to push the price higher affording them the opportunity to sell out of some of them at higher levels if seen. That would explain the huge buying taking place yesterday as well as the subsequent lack of follow through later on.

Now I may be putting 2 and 2 together here and arriving at 5 and it is entirely possible that it was simply some huge fund buying back what must be now massive short positions because of the failure of the price to yet breach the SNB’s 1.2000 floor. There was also talk yesterday of extremely large buying earlier in the day before the spike up in the price, of large put options struck below that 1.2000 peg. Once again that cannot be confirmed one way or the other. What is certain is that the SNB must now be extremely anxious on the possible effects of a Greek exit or EUR breakup and how that might make their job of protecting the 1.2000 peg extremely difficult should the EUR go into meltdown as a result.

The SNB is due to release their monthly reserve data on 7th June and that should give us a much better insight into just how much they have had to intervene, directly or indirectly to hold the price around 1.2010 in recent weeks.

As I conclude this update the EURUSD is pushing markedly higher, back towards 1.2600 as talk circles of a decent sized 1.2600 option expiry today. That is making the prospect of a reversal here quite live and I am a little nervous that we may just see that kick in. It is of course news and flow dependent and at this stage in the day I am taking nothing for granted as ahead of the weekend anything could happen with this much uncertainty abounding. There are constant rumours circulating the mill on every conceivable outcome and prospect; so much so that it you believed just 10% of them you would make some serious mistakes. I try to pay no attention to most of them and hence don’t pass them onto to you. The direction is still very clear in my mind and that is for further EUR weakness regardless of whether Greece stays in or outside the union.