December 14, 2012 6:20 pm by Ashraf Laidi
Traders books nearing year-end are unwinding euro shorts vs. gold, which were accumulated in early May by Greek elections uncertainty. The elections risked placing anti-austerity left wing party in power and pushing the country out of the Eurozone.
May-June 2012 seemed like the perfect storm for euro pessimists, while the anti-EUR (US dollar) was boosted by market uncertainty about the Fed’s renewal of Operation Twist and possible lack of QE3 (which was eventually renewed in September).
Today, the successful completion of Greek buybacks, Greece’s receipt of its much needed €33 bn tranche and preliminary accords on EU Banking Union have further weighed on “tail risks”, which were initially quelled by Draghi’s Outright Market Transactions three months earlier. It’s important to reiterate that the ECB’s OMT was aimed at addressing the fiscal or debt problems of the region, but to reduce tail risk – also known as “redenomination risk”. This has happened—as seen through crushed volatilities.
We stick with our $1.35 target for EUR/USD as the renewed momentum renders this a “secular” euro rally, courtesy of an ECB remaining head of the curve (send ball back to governments’ courts) and of a US central bank zooming in on a 6.5% unemployment target at the expense of interest rates and its currency. As for Gold vs EUR, it is now retesting its 55-WMA, a level holding since Nov 2008.Seen in a different way,Gold-EUR was on its way to falling below this key level until it was saved by the explosion of event risk from those near-catastrophic Greece elections. Now with Greece PM saying the chances of a Grexit have fallen to zero and traders needing to exit out of positions, testing EUR 1220 for gold looms large.