FX Update: Market Doesn’t Know What To Do With The Euro

 | Jun 30, 2015 06:44AM ET

The market is clearly very confused on what to do with the euro as the uncertainty over Greece hangs over the market.

The one correlation that seems to hold, regardless of whether we can discern the logic, is that weak risk appetite is generally rather euro supportive, as yesterday’s late meltdown in risk appetite in the US saw the USD generally on the back foot and EURUSD spiking all the way back to 1.1250. Elsewhere, weak risk appetite continues to support the JPY in particular.

Signs of deep confusion on what to do with the euro after yesterday’s action only seem to show that euro remains negatively correlated with risk appetite, for whatever reason. Is it position unwinding of European stocks and related short euro hedges or

further unwinding of outright short euro positioning?.

This may continue to drive the action, but at some point, signs of an existential crisis for Europe can hardly be considered a euro positive. For example, exploding EU peripheral spreads like we have seen recently will serve as a strong headwind for further euro gains if they continue to widen.

Spain and Italy are now well over 150 basis points wide of Germany at 10-year yields and at the highest level in almost a full year, in the case of Spain. Eventually, as well, the wider spreads and general turmoil are going to have the European Central Bank on the quantitative-easing warpath to do “whatever it takes” to bring yields back lower.

EURUSD confusion reigns
Confusion for the market after yesterday saw EURUSD closing the gap opening on Monday and then some – we may need to wait for the other side of Sunday’s referendum to find a resolution here – either above 1.1400 or below 1.1000, as few may be willing to commit to a directional move amid the intense uncertainty of whether we’ll see a Grexit and if so, the contagion risks.