Where’s the demand coming from?
It has been the great market stumper for the better part of two weeks now. Why is the euro so strong?
Dow Jones is running a piece speculating that European bank recapitalization may have something to do with it. In essence, they think European banks are selling assets and bringing money home to shore-up balance sheets. No doubt, that is part of the picture. After all, deleveraging during the Lehman crisis caused an unexpected surge in the dollar. European deleveraging would support the euro, it stands to reason.
Another part of the puzzle appears to be renewed demand out of the Middle East and Asia. The Middle East has been a big buyer on every dip for several sessions now. One reason could be a big jump in revenues as oil prices rebound sharply. Another could be fears that the Fed is about to embark on another round of quantitative easing.
The largest part, in my view, comes from traders looking at the macro situation in Europe and concluding there are no easy fixes and that the much-awaited EU summit tomorrow will over-promise and under-perform yet again. But they continue to run into sizable buyers limiting dips and their patience is being tested. Constantly adding to shorts but getting no joy from them surely tries a man’s soul. And makes him experience fear rather than greed. Once those emotions flip, EUR/USD rallies all the more as the shorts cover, pushing prices higher.
As I noted earlier today, the most frustrating thing about financial markets is that you can have the exact right macro view but still lose money if your entry points are not perfect. I fear a sharp short-covering rally in the next 24-hours followed by renewed weakness later in the week after the event risk from the EU summit is over.