Is Near-Term Euro Momentum Stalling

After returning to levels prior to the Europe's 'shock and awe offensive the euro appears to be trying to find a base. There is a bullish divergence in the hourly RSIs.

There also is a stark contrast between the bond market reaction and the currency market response. In the bond market the measures have supported prices and the risk premiums have been reduced dramatically. After the initial 12-hour rally the euro has traded heavily.

The euro's decline is over-determined. Clearly the disintegration of the euro zone, which some observers have posited, would be euro negative. But the success of their efforts is also euro negative. Foreign demand will have to be relied on to offset the anticipated decline in domestic demand. Given Europe's reliance on exports (rather than build locally, sell locally as the US and Japan do) this means a weaker euro.

However, these are medium term factors, while short-term considerations such as the extreme positioning, including the new record premium for euro puts over calls, warns of the risk of a corrective bounce. The bullish hourly divergences are a warning signal that that corrective bounce may be approaching.

Because we think the euro's downtrend is not over, medium and long-term investors best advised to be prepared to take advantage of this anticipated euro bounce to raise hedges and/or reduce euro exposure. Such a bounce could carry the euro first to $1.2800-30, and there is scope for maybe another cent, if this barrier gives way. On the downside, a break of $1.2660 would likely negate the constructive short-term technical signal.