News: Euro Crosses under Pressure as Specs Get Short

The news wires have been a buzz in the last few days with Cyprus news and fresh European weakness.  The general theme is that the Euro no longer faces an existential crisis, but must now navigate a prolonged series of fiscal crises which pose a threat to growth.  Indeed, news of yet another insolvent sovereign, or the reversal of progress in countries which have already received rescue packages has certainly weighed on confidence.  More importantly however, the necessary fiscal consolidation of periphery countries has definitely put a significant dent in short term aggregate demmand. 

On FX, a story is emerging which appears strikingly similar to earlier analysis here on FX Fusion.  Namely, the Euro rally from earlier this year was due to a pricing out of catastrophic tail risk, but the rally would fade as the reality of medium term growth concerns got priced in.  This would be followed by a broad recovery in the Euro in 2014.  The last part of this story has yet to come true, but I remain confident that those who go long EUR/USD later this year (not yet!!!) will be pleased in 2014.  

Right now however, focus remains to the downside as investors seek assets denominated other currencies with limited exposure to Europe's short term woes.  EUR/AUD bears are back in force.  Focus is also on EUR/NZD and surprisingly EUR/MXN.  Traders see further downside in these pairs as well.  Traders are steering clear of EUR/JPY, EUR/CHF, and EUR/GBP.  The Yen, Franc, and Sterling all have decidedly dovish central banks, a factor which may well outweigh any softness in the common European currency.  

EUR/MXN is an interesting animal.  I profited greatly by selling this pair during June and July of last year, only to give back nearly 80 percent of my profits post Draghi 'whatever-it-takes.'  Now EUR/MXN is poised to punch through last summer's low.  If I jump back on the bandwagon, I will do so by selling EUR/USD with at target of 1.26, and a stop at 1.30.(I remain long EUR/CHF)  Otherwise, I still look to get long the EUR against USD and JPY later this year, for now.