We passed a major fundamental hurdle today in the auction of the ECB’s three-month lending facility. Why was this so important? It represents a clear gauge of how much capital European banks need as the Long-Term Refinancing Operation (12-month facility) expires tomorrow and 442 billion euros is expected to be drained from the market. The 132 billion euros drawn was surprisingly low and gives us the initial suggestion that the region’s financial institutions are in much better shape than we had expected. Under the assumption that this was a major bearish concern for the global market, we would expect risk appetite to rebound sharply on this news. In fact there was an immediate bounce and a particularly strong performance from the euro; but sentiment has not charged ahead. Skepticism around this particular event remains (are banks not drawing more because they are afraid of the stigma), the Euro region’s troubles are far more expansive than just this issue, the EU bank stress tests represent another tangible concern and Friday’s NFP a completely unique concern that can act as an anchor on price risk appetite.
For my positioning, the bounce in risk appetite has leaned on a few of my positions. The most meaningful response came from EURGBP which has bounced back up to test its former support at 0.82 and has put the recent addition to my short interest around breakeven (the second half is still well in the money). Another disappointing reaction was for my GBPUSD long which was stopped out. The setup failed not because of the fundamentals but because of my positioning. I had set my stop tight at 1.4980 with the expectation that we would see immediate follow through on upside momentum – but that was a risky bet given the level of event risk we had. For my other two risk averse pairs (short USDCHF and AUDCHF); today’s events would not put me off pace. In fact, AUDCHF is extended its massive break from yesterday and USDCHF is slipping below a medium-term trendline and 50 percent Fib at 1.08. Back in USDJPY in a smaller size from 88. 35, we have not seen much progress in either direction.
For potential trades, I am watching many of the same from yesterday. GBPJPY has dropped off my list given the lack of conviction in sentiment and the pair has trickled below 133. Similarly, GBPCHF is off as it has breached support and I’m not interested in the short side. Still interesting though is GBPNZD. Having stalled below its long-term trendline, we have a good opportunity to consider a breakout or reversal scenario. I’ll await a clear bearing on risk for this assessment. CADJPY is coming down quickly to potentially complete a very large head-and-shoulders pattern while CHFJPY is near a termination level for an ascending triangle pattern. I am still waiting for AUDNZD to come to a resolution on its congestion pattern. A new one to watch is EURCAD. If sentiment truly does improve for the euro (I will still not like the fundamentals for the medium-term), this severely depressed pair has already broken a clear descending trendline and could give way to a meaningful correction. Always have options.
