EURUSD heads higher, unfazed by event risks

Market ignoring all of the coming risks for Europe as the painful direction for the market remains to the upside in EURUSD and EURJPY.

The markets seem to believe in magic for the moment on Europe – as tail risks continue to fall while there is no new sign that a longer term solution is on the table for Greece or the rest of the EU periphery. No matter – the market tells its own truth, and as long as the market is able to write off the long term risks of social tensions at the periphery (the tail risks) and as long as the ECB is effectively prohibited by the EU framework from the kind of monetary policy measures that are possible from the BoE, the US Fed, and what is increasingly being anticipated from the BoJ, the Euro risks trading higher, particularly as positioning has been caught on the wrong foot by the break below support recently.

Chart: EURUSD
EURUSD is swinging through the final resistance levels that barred its re-entry into the previous range, and this could be the setup for an even larger move higher assuming this weekend’s Catalonian regional election and whatever emerges from Greece early next week fails to reintroduce EU tail risks. Positioning is not ready for a move back higher after the recent move lower proved a head-fake. The next key is the psychological pivot at 1.3000, which was pivotal for most of September and October as well. Above there, and the 1.3170 resistance may not stand a chance, so we have to project 1.33-13500 range, thought that much USD weakness will also require that the fiscal cliff proves a mere fiscal blip and that the equity market pushes back towards the highs for the cycle. These kinds of level are absurd and unsustainable, but they’re not impossible in the short term under the right conditions.

Looking ahead
As indicated in the chart caption above, the immediate focus is on this weekend’s Catalonian regional elections and whether we eventually see a constitutional crisis in Spain based on a move toward the new leadership in Catalonia for a referendum on independence for the region. Looking at Spain’s spreads, the market isn’t at all bothered for the moment, so it may remain a longer term question. Then it is on to what kind of deal, if any, has been hammered out for Greece. One would think that debt forgiveness and restructuring would be the most Euro-beneficial for the Euro crosses, though it would lead to longer term questions over other the solution for other periphery countries.

Elsewhere, next week we get down to political “fiscal cliff” business again in the US as most of the US has taken a 4-day weekend if we include today and yesterday’s Thanksgiving holiday. The rhetoric seems awfully optimistic there relative to potential pitfalls, but let’s see what develops. The latest indications from Republican House Speaker Boehner is that he is would like to see “Obamacare” on the table as a bargaining chip in the fiscal cliff negotiation process. The tax cut side of things could get far more controversial than the spending cut “sequester “ portion, which will likely be quietly agreed on as all politicians, regardless of their affiliation, like to see federal spending in their local district.

Also, look out Monday for the BoJ minutes, which could hint at what the BoJ is pondering for future easing – particularly if foreign assets are on the table. The bigger focus remains on what the political leadership plans to do in terms of appointing a new BoJ leader and pushing on the fiscal stimulus side of things among other measures to weaken the JPY . Shinzo Abe, the likely new LDP Prime Minister next year after the Dec. 16 lower house elections, has been explicit in encouraging a full engagement in competitive devaluation and has even proposed at JPY 200 trillion stimulus package, which would represent over 40% of GDP. Compare that with Obama’s first stimulus that was around 5% of GDP. The numbers boggle the mind.

Economic Data Highlights (all times GMT)

• Germany Nov. IFO Survey out at 101.4 vs. 99.5 expected and 100.0 in Oct.
• UK Oct. BBA Loans for House Purchase out at 33.0k vs. 32.0k expected and 31.5k in Sep.
• Canada Oct. Consumer Price Index out at +0.2% MoM and +1.2% YoY vs. +0.1%/+1.1% expected, respectively and vs. +1.2% YoY in Sep.
• Canada Oct. Core CPI out at +0.3% MoM and +1.3% YoY vs. +0.2%/+1.2% expected, respectively and vs. +1.3% YoY in Sep.

Upcoming Economic Calendar Highlights (all times GMT)

• Japan BoJ’s Shirakawa to Speak (Mon 0100)
• Japan BoJ Minutes released (no time given)