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Dormant since the first half of 2011, euro bulls have taken the forex market by the horns over recent days. Aided by the Fed’s open-ended commitment to keep the printing press running until American employers show much more willing, both investors and traders have been scurrying to reduce what had become a huge structural short position in the single currency.

Friday was cathartic, with the euro barely retreating all day as buyers were forced to accept whatever price they could get.   Since the last week of July when Super-Mario vowed to do ‘whatever it takes’, the euro has soared by 11 big figures. Moreover, the single currency has registered significant gains vs other majors as well – for instance, the yen has lost 8%, while both the Aussie and the pound have dropped more than 4%.

Guest post by Forex Broker FxPro

The only ‘currency’ that has kept pace with the surging euro has been gold, which almost reached USD 1,780. Gold bulls will want to see February’s high of USD 1,790 breached relatively soon. Contributing to the dollar’s latest demise on Friday was some very weak industrial production data. High-beta currencies are back in the sweet spot – the Aussie traded above 1.06 to a 6m high.

Commentary

Yen suffers after more threats from Tokyo. More strident threats emerging from Tokyo regarding intervention put the yen on the back-foot on Friday. Even the dollar, which was suffering against most major currencies, managed to make progress against the yen – USD/JPY rose 1% from a low under 77.50. EUR/JPY was an even bigger mover, spiking more than 2% to the 103 level; it is now above the 200d moving average for the first time since May. Another explanation for the weakness of the yen on Friday is that some of the money that had been parked in the Japanese yen as a safe haven has fled for riskier climes now that some perceive that the coast is clear. In addition, the BOJ themselves may well ponder further asset purchases very soon with the economy expected to contract in the current quarter.  

The Spanish conundrum. One of the hot topics at Friday’s Ecofin meeting in Nicosia was Spain and how to coax them into accepting financial aid from Europe’s rescue funds. Spain’s troubled banks are already accessing EUR 100bn of funds from the EFSF, but Prime Minister Rajoy continues to prevaricate over whether the sovereign should also apply for assistance. Despite mounting pressure from the likes of France, Rajoy and his ministers are still procrastinating, conscious that aid from Europe will come with strings attached. For now, the huge decline in Spanish yields over recent weeks has afforded the government with some welcome breathing room, with Rajoy appealing for time to assess the ECB’s bond purchase scheme.   Meanwhile, there has been a significant re-pricing of risk in bond yields for Europe’s troubled sovereigns, a function of Super-Mario’s scheme, structural reforms and the expectation that Spain will ultimately apply for some aid. Understandably, some of Europe’s leaders want to see this lift in mood across Europe sustained, hence the pressure being applied to Rajoy. The latter seems even less disposed to submitting an application, arguing that another bailout may not be needed because of the reduction in borrowing costs. Interestingly, Spain’s hesitancy is supported by none other than German Finance Minister Schaeuble. Notwithstanding the immense political challenges faced by Rajoy in terms of placating a deeply nationalistic streak in Spain, he needs to bite the bullet on aid while the going is relatively good. The current market calm is merely a false facade, created by a fortuitous alignment of various forces. Better to get pen to paper now, rather than be forced kicking and screaming in a few months time.