Is the Euro making a bottom?

An especially quiet
night of trading in the FX markets as various religious and national holidays
have curbed order flows this week.
The EUR/USD briefly touched the
1.1900 level but bounced back trading at 1.1930 by midday in Europe. Both EZ PPI
and Unemployment figures printed within expectation providing no volatility to
the market.

In light of firmer US eco data the move below the
1.2000 figure in the pair is completely understandable. Yesterday’s ISM
Manufacturing numbers which exceeded expectations by full 7 points, reaffirmed
the dollar bulls argument that US economic demand remains strong. The move in
the EUR/USD was further accelerated by poor market positioning, as our own
internal SSI index reached near extreme levels with 2.5 euro longs for every
dollar long. With everyone trying to find the bottom, is it any wonder that it
didn’t materialize?

Yet despite the dollars impressive rally we
believe that most of the down move in the EUR/USD is behind us. With Schroeder
now willing to concede to Merkel, the political risk that has hung over the euro
for the past two weeks will soon dissipate. Meanwhile, although US production
data is inarguably better than expected, the question remains: with US consumer
sentiment at decade lows, who will the producers sell to? Some analysts
including Michael Shedlock even speculated that the rise in ISM was due to
post-Katrina hoarding as companies feared scarcity of inputs. Should they have a
hard time working off this inventory build, the numbers will not be nearly as
rosy in the future. Finally other positioning measures, including the latest
CME’s Commitment of Trader’s Report are showing very skewed results especially
in the Swiss franc contract which registered a 99% extreme with specs wildly
long the dollar while commercials are long the Swissie. Thus a word of caution
to dollar longs. On the CME at times of extreme positioning it rarely pays to be
on the side of the speculators.

Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report