Between problems in Europe and problems in the US the EUR/USD currency pair has it's fair share of up's and down's. Troubles with the European Union namely Italian and Spanish bond yields coupled with a Non Farm Payroll miss in the US means traders of the pair have some big decisions to make.
Friday, after the jobs number came out the reaction was clear, Euro up, Dollar down which was strange to some as the US index futures were taking a hit at the same time the dollar was. This was a product of a reversal in the trend of US dollar inflows supporting the dollar recently. The US was the least ugliest duck in the pond so money flowed in to buy US assets. The recent rise in Spanish bond yields is the real culprit I suspect though. The US jobs number was just the straw that broke the camels back. That will make the pressure to raise Euro's stronger than the pressure to raise dollars in the coming week as a lot of the inflow into the US came from Europe.. Also the likelihood of more US QE should weaken the dollar across the board.
A look at the pair on a monthly chart shows the roller coaster ride traders have been on for the past 3 years. . Notice the last two months on the chart show what looks like a hammer reversal. This could be the case but if you zoom out a bit the lower highs become evident and show that it's not all peaches and cream.
This is the "on again off again" nature the pair has taken since the crisis began. We can expect more of this until the crisis is over. In the mean time there's pips to be had for the trader that stays on top of this pair. US Fed chairmen Ben Bernanke has a speech Monday April 9 at the 2012 Financial Markets Conference. It's at 7:15 pm so US markets will be closed by then but the days action will no doubt have some baring on what he says. The pattern has been FOMC minutes boost the dollar and Bernanke comes soon after to pull the rug from underneath before it gets too strong. I see no reason for this pattern to end.
I'm looking for Euro strength this week to surprise most traders as it did Friday. But if Spanish bond yields continue to rise all bets are off. Confidence in Spain to control it's budget deficit or lack there of is showing up in bond yields. Less demand at the most recent auction is a warning sign. The fact that Spanish Banks issued bonds to themselves, got them guaranteed by the Spanish government then turned around and used these bonds as collateral to get LTRO money doesn't sit well with some bond investors. It makes it look as though Spanish Banks and the Spanish government are too close to be honest with foreign banks. This may be keeping foreign banks from investing in Spanish debt that otherwise would. Italy is just caught in the cross fire this time as investors are afraid of contagion so they sell everything that's not nailed down.
Unlike late 2011 liquidity isn't a major problem in the EU so the market swings have the potential to be less drastic. None the less LTRO didn't solve the sovereign problems of the EU, and from the looks of Spanish yields it may not have even given the EU as much time as the market thought. There are land mines all over the market. A slow down in Europe may lead to a slow down in the US. More data is needed to confirm that but caution is warranted and highly suggested.