Stress Test Jitters Send Euro Plunging

The Euro was up in early session trading ina continuation of Thursday’s strong rally before jitters about today’s stresstests triggered a profit-taking correction. From an early session high at1.2965, the Euro broke to 1.2793 shortly after the New York opening.

The Euro was up in early session trading ina continuation of Thursday’s strong rally before jitters about today’s stresstests triggered a profit-taking correction. From an early session high at1.2965, the Euro broke to 1.2793 shortly after the New York opening.

The EUR USD spiked to 1.2910 immediatelyafter stress test results began being released, but sold off quickly as traderswere disappointed with the results. Although only by a small amount of Europeanbanks passed their stress tests, investors remained skeptical about themethodology used by the regulators. Many viewed the guidelines used as too easyon sovereign debt.

As expected, Germany’sHRE, Greek’s Atebank and Spain’sBanca Civica failed their tests, but most banks passed even in hot spots suchas Greece and Spain.

The biggest concern for investors was thatstress tests excluded the possibility of sovereign debt default. Sovereign debtheld in portfolios was distinguished from sovereign debt held to maturity. Debtheld for trading is expected to be marked to market; debt held to maturity isnot.

The problem with this separation into twodifferent types of debt means that it is possible that losses by banks will beunderestimated. This could hurt the financial health of European Banks andundermine the credibility of the banking system.

The concerns being raised by investors isputting pressure on the Euro at the mid-session, but could trigger the start ofa longer-term correction especially since technical patterns are suggesting thepossibility of a reversal top.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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