Meanwhile, the euro has appreciated versus Asia’s 10 most-active currencies this month, rising 4.6% against the yuan. And since hitting a low of 1.1875 against the dollar on June 6, it has gained 1036 pips, or 8.72%, as of Friday’s close.
The problems that observers have with the tests are numerous. For one thing, the tests only measure the sovereign debt that banks trade and not the debt held to maturity, which is the vast amount. Also, the possibility of sovereign default was not taken into account because policymakers would not allow one to happen.
China is supporting the euro in an effort to boost exports. One way to accomplish this would be to buy European sovereign debt, which would help to restore confidence.
Spain and Greece were recently able to sell debt in the open market at higher prices (and lower rates) than those offered by the ECB backstop program. What we don’t know is who exactly is doing the buying, because the data isn’t published.
What we also know is that 3-month euribor rates remained at their highest levels for the year. This rate reflects what banks in Europe are charging each other to borrow euros and therefore is not set in the open market.
What we’re left with is a dichotomy; Sovereigns are selling debt in the open market at better rates than those available from the ECB itself while at the same time, European banks are apparently showing reluctance to lend euros to each other on the European interbank market since 3 month rates are at their highest point of the year (track euribor here). Rising euribor is not necessarily indicative of where the euro will trade because while it did rise between April and June as the euro collapsed, it has continued to increase since then even as the euro improved (3 month euribor also fell from the beginning of the year until April as the euro declined).
The bottom line for me is that even though there seems to be a good bit of doubt regarding the validity of the tests, I don’t see that the results are going to cause a real downward trend even if the initial reaction is negative.
For now, I’m sticking with my theory that China is supporting the euro. But that doesn’t mean I’m looking to get long at recent tops. As almost always, when I want to buy something, I wait until price has retreated somewhat and far as forex is concerned, I use Fibonacci to spot these levels.
The attached chart measures the rise of the euro against the USD since June 6. The first place I would look to buy is 1.2858 for 2 reasons. First, it is near the 14.6 retrace level on 1.2860 and second, that level represents a 61.8% retrace (in pips) from Friday’s high. Should that fail, the next place I would look to get long would be at the 23.6, which is where support was found on Wednesday and Thursday. A close below the 38.2 would indicate a further downside move to me.
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