3 Reasons Why the Euro Rally Could Carry On

EUR/USD traded above the 1.3000 handle last week when a resolution was finally reached for Greece’s debt crisis and when its second bailout package was approved. However, as Pip Diddy warned in his daily forex fundamental report, some market junkies think that the euro rally we saw on Friday may be as fleeting as Cyclopip‘s love life.

It makes sense. After all, it seems like a Greek default had been priced in a long time ago and it’s possible that market participants are just expressing their relief that it didn’t happen.

However, I think it’s noteworthy to point out that there are already rumors of Portugal needing a bailout which traders seemingly ignored.

Does this mean the euro’s rally will continue? Here are a few reasons why the shared currency could head higher.

1. COT report shows that short EUR positions were significantly trimmed last week.

The CFTC publishes the Commitment of Traders (COT) report every Friday. Because it measures the net long and short positions taken by traders, many regard it as a great gauge to measure how heavily positioned traders are in the market.

COT Report

Comparing March 13 to March 6, we see that the number of short EUR positions dropped by 16,755 for non-commercial (which includes speculative) traders. Sure, some analysts may say that this could be nothing more than just short-covering or profit-taking. But, it could also be because market sentiment is already shifting.

2. Talks of increasing the ESM and EFSF capacity

Remember that the temporary bailout fund, EFSF, and the permanent one, ESM, have a combined lending capacity of 500 billion EUR. However, with talks of Spain’s balance sheets getting worse, the euro zone might need to expand its bailout packages.

A senior euro zone official has already suggested that the combined capacity of the two funds should be increased to around 700 billion to accommodate the needs of Spain.
However, whether or not this plan pushes through, we’ll have to wait for the EU finance ministers to decide on March 30 to 31.

3. Fewer people expect euro zone breakup, more investors willing to hold PIIGS bonds

Based on a survey conducted by Barclays Capital, the number of respondents who believe that a euro zone breakup is in the cards has lessened considerably after Greece managed to secure another set of bailout funds. Among the 700 respondents included in the recent survey, only 40% foresee that at least one country would get kicked out of the euro zone, down from 50% last November.

In fact, majority of the institutional clients surveyed even expressed willingness to hold bonds from the PIIGS nations for this quarter. This is a sharp contrast to Barclays’ November survey, which revealed that nearly 70% of the respondents weren’t in the mood to park their money in PIIGS bonds maturing in 2012.

Still, some respondents believe that Portugal or Ireland will restructure its debt this year but they expect this to have a minimal impact on the euro, unlike Greece.

For now, it seems that the euro is still on a high following the relatively favorable resolution of the Greek crisis. Market participants seem to be drawing optimism from the fact that Greece was able to secure more aid and that other euro zone nations deep in debt might be able to do so as well.

Although the factors that I enumerated could keep the euro afloat in the near term, there are still plenty of uncertainties that remain in the euro zone. Do you think that another debt saga will unfold and trigger another long-term drop in the euro? Let us know what you think by answering the poll below!

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