Euro Shorts Squeezed Hard, Stocks Hit 4-Year High

The euro surged on Tuesday on a round of short covering that nearly reached 1.25. The single currency was the best performer on the day while USD lagged. The top item in Asia-Pacific trading is Japanese trade balance. Less than 12 hours after Ashrafs Premium Insights titled Exploiting Summer Doldrums suggested new 4-year highs in equities and prolonged consolidation in the VIX, risked appetite pushed the envelope to new highs.

The euro continued to rally in US trading, hitting 1.2488 before edging back to 1.2464. Cable followed along, hitting a three-month high of 1.5805.

A rally to a four-year high in the S&P 500 sparked the moves. The index rose as high as 1426 but was unable to hold the gains and slipped back to 1413.

It was difficult to find a fundamental driver for the euro rally. Some attributed it to a better tone from Germany ahead of meeting with Greece later this week. Senior lawmakers said concessions are possible if the Greek government puts in a plan to meet the main targets. Spain also sold one-year debt at 3.07%, 85 basis points lower than a month ago.

The euro rally appeared overdone and more-likely a result of short covering in EUR/USD and EUR/AUD than optimism. Further evidence of short covering comes from the inability of CAD to rally or JPY to sell off.

Gold reached a pivotal level at $1641. The high coincides with the June 3-month high and the 200-day moving average at $1643. Expectations for QE3 were given a slight set-back after the Feds Lockhart says disinflation and deflation are not concerns.

At 2350 GMT, Japan will release trade balance data for July. The report will underline oil price rises, which are a key headwind. Japan is importing oil in vast quantities to make up for nuclear shutdowns and the result is an expected 272 billion yen deficit in July. At the same time, exports are forecast down 2.9% in the month.

The Australian leading index (0030 GMT) and DEWR skilled vacancies (0130 GMT) are also on the docket but unlikely to drive trading.

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-AB