views

RELIEF RALLY IN THE EURO IS TENUOUS

DIRECTOR OF CURRENCY RESEARCH, GFT

WITH so much negative sentiment aligned against it, the euro unsurprisingly started the week with a strong relief rally. The latest positioning data from the CFTC released last Friday revealed that speculators added 18,620 fresh new shorts, resulting in total short exposure of 111,945 contracts – the second highest reading this year. Typically when positioning reaches such extremes, a short covering rally ensues. With the market so severely biased to the short side, any rally could result in further appreciation for the single currency as the weak shorts are squeezed out.

However, the bounce in the euro may not be purely technical. Last weekend, France – the Eurozone’s second largest economy – announced that it intends to raise the retirement age to 62 and cut spending by €45bn. Prime Minister Francois Fillon said that the cuts should bring the French deficit back to the 3 per cent EU limit.

The raising of the retirement age is a well overdue policy change designed to address the long-term structural demographic problems facing the continent. The Eurozone now carries some of the largest public benefit liabilities in the industrialised world. At a time when medical advances have extended the average lifespan considerably, Europe simply cannot meet its retirement obligations as they are currently structured. Ultimately, the retirement age will have to be raised to 70 years or higher to balance the actuarial tables, but for political reasons such drastic moves cannot be implemented instantly. Nevertheless, if Europe wants to avoid the chronic threat of a bond market boycott, it will have to get its financial affairs in order. France’s move was a step in the right direction.

But despite moves to curtail fiscal spending, the euro’s recovery is tenuous at best. Currency markets remain nervous and the further downgrade of Greek debt by Moody’s sparked fears that Spain may be next. For the time being, the euro has found a near-term bottom at $1.1900 but its upside is limited to $1.2500 as range-bound trading appears to be the theme of the summer.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.