The Fate of EUR

From Greece to France and latest German … the story line remains EUR bear. The common currency tumbled to its lowest point in over four years on the news that the German government temporarily banned naked short-selling. Instead of solving the problems, it created wilder volatility and more speculations with measures included bans on naked short-selling and naked credit default swaps of the Euro area government bonds, as well as a ban on the naked short-selling of shares from ten major German banks and insurers.

Let me clarify, there is one critical difference between conventional short-sell and naked short-sell – in the practice of a conventional short trade, the party executing the short trade secures or borrows the underlying assets if is shorting from a third party, whereas in the naked short, this is not done.

With investors shedding risk and seeking out the safe haven assets, pretty much all major currencies have retreated against the Greenback and the JPY. Oil will be at its lowest level and it is going to be interesting to observe the gap between the GBP and EUR to widen further. The coming US-China Strategic and Economic Dialogue that will commence in Beijing on May 24, will be less an event to talk about RMB revaluation. Still, the agenda this year bears similarities to the 2009 edition with trade and savings imbalances to dominate the economic talks followed by reviving ‘Six-Party Talks’ with North Korea among other. The RMB at this point will remains pegged to USD, though concerns about the EUR have boosted the Chinese currency’s valuation on a trade-weighted basis in any case, which could forestall a move or limit its degree.

Our markets will continue to be under selling pressure with the support level at 1,280 and lesser attention will be paid to current reporting season. For one strange reason or another, the usual dictum ‘ Sell in May, Go Away’ seems quite applicable in this case. Perhaps, just another coincidence, I guess. Of course, the run-up to the Jun-Jul 2010 FIFA World Cup finals in South Africa is not helping either.