New Week, Dollar Remains Firm

Today is the seventh consecutive session in which the euro has recorded a lower high. It has been making lower lows as well, but that streak is under threat today if North American participants do not extend today's losses through the $1.3575 area. A break of $1.3550 could spur another cent decline in quick order, though a larger barrier is rumored to have been struck near $1.3500.

In addition to better news stream from the United States and the deteriorating situation in Europe, the increase in US yields is also lending the dollar support. The greenback has risen to JPY83.00, its highest level since Oct 7. The next key level is near JPY83.75, a break of which would allow for a return to JPY85.00.

Of the majors, sterling has been fairly resilient in the face of reduced risk of a new round of asset purchases and a less dovish quarterly inflation report. However, sterling looks particularly vulnerable. Key support is seen near $1.5950 and it that were to go, scope would exist toward $1.58. Although most IMM net positioning were little changed, the near tripling of net long speculative sterling positions are an exception and are now the highest since March 2008. These late sterling longs appear to be in weak hands and vulnerable to a reversal of spot.

A great deal of uncertainty continues to hang over Ireland. A number of European countries are pressuring Ireland to formally seek aid to stop the contagion, but Ireland, with cash on hand for several months does not want to be dictated to. The 80 bln euro package being thrown around is based on Irish refinancing needs through 2014. However that also presupposes the cost of the bank bailout will not grow. There is some talk that Ireland may seek to tap the EU's 60 bln funds, separate from the EFSF (the ostensible 440 bln euro facility, which is really closer to 350 bln euros when everything is said and done) and is possibly seeking an avenue that would be available for Irish banks as opposed to the sovereign.

The premise that a solution in Ireland would relieve the systemic risk is questionable. First, Portugal's foreign minister made some remarks about the failure to adopt the government's budget may force Portugal out of EMU. Second, Eurostat now says that the Greece's 2009 budget deficit was really 15.4% rather than 13.6% as previously. The larger deficit means that more austerity will be needed.

Third, the statement issued by Germany, France, UK, Italy and Spain before the weekend, clarifying that the EU-approved systemic debt restructuring mechanism does not apply to current issues but only after 2013 helped support peripheral bond prices, but is exposed to the other horn of the dilemma--which is namely that there still is not resolution to the current debt dynamics, which investors are judging to be unsustainable.