Market still complacent ahead of EU summit

Publication date: 27 June 2012
Author: John J Hardy, Saxo Bank

This is a nervy market as we head into the EU Summit tomorrow and Friday (and possibly throughout the weekend). It really is beginning to become “do or die” time for the EU politically considering the intractable position of Germany (some aid, but with oversight and guarantees on fiscal side) vs. the Club Med approach of shared responsibility and where we are with the overleveraged EU financial system. It is critical to have a look at Steen’s column () today on the possible outcomes for the summit and what they might mean going forward.

EURUSD and 1.2500
1.2500 had been the psychological magnet for EURUSD for the last three days as neither side of the trade wanted to overcommit ahead of the EU summit to close the week, but the magnet might be losing its force as we head into the US trading hours. To the downside, the 1.2450 is the trigger area for a push to sub-1.2300, (question whether we have to wait for summit outcome for a firm break) while to the upside, perhaps the 200-hour moving average can serve as a swing level.

Looking ahead
This is very much an ad hoc market as we all have our eyes peeled for the headlines in the coming days. The market seems spectacularly complacent given what is at stake here, with the S&P 500 off a mere 3% from recent highs as I write this. Are we to suppose that Bernanke’s money printing can offset a systemic collapse in Europe (not that the latter will necessarily happen here and now, but one would think that at least a mild worry that this scenario comes about would be priced into the market.)

As well, AUDUSD is off to the races even as metals prices remain droopy here and China’s Shanghai composite remains near the bottom of the recent range. Also interesting to note that WTI crude under 80 dollars a barrel isn’t doing more to weaken CAD. According to the longer term correlations of CAD and crude oil, CAD is still far too expensive.

Watch out for the SNB’s Danthine out speaking very early tomorrow.