Euro Reversal a Powerful Signal

A rout in the euro turned into a rally in an impressive reversal Monday. Global stocks were beaten up as the yen led the way and loonie lagged. Japanese housing and wage inflation data is due later but the focus will remain on Chinese stocks. Despite the initial plunge in the euro, the currency closed Monday about 40 pips above Friday's close. 4 of the Premium trades are in progress, including EURCAD. EURJPY was stopped out, before returning to the initial entry level.

The euro reaction to bad news on Greece over the past month has been tough to reconcile. We highlighted skews in bunds and carry trades that made it a tricky trade. The price action on Monday confirmed it.

A nearly 200 pip gap down at the open in EUR/USD was filled and that was followed by a squeeze to 1.1270. The chart is daunting and shows an enormous bullish engulfing candle. It may finally set the stage for a breakout above 1.1450 but most traders are rightfully gunshy of the euro at the moment.

The more straight-forward trade has been in the yen as risk aversion dominates. Stocks in Europe fell 3-5% and the S&P 500 fell 2.1% to wipe out the year-to-date gain. The yen remained well-bid throughout the day and the close in USD/JPY was the lowest in a month. With US and Chinese stocks breaking down, along with continued uncertainty in Greece, the yen may continue to find bids as a safe harbor.

Looking ahead, the Japanese labor cash earnings report is expected to show a 0.7% y/y rise in May. It's due at 0130 GMT and followed by housing starts at 0500 GMT. The pace of home construction is expected to rise to 0.915m from 0.913m.

The Japanese data will probably have little effect on markets. Instead, the focus will be China where shares fell 3.3% Monday after an initial 2.7% rally at the start of the day. The drop broke below the May lows and will no-doubt concern the PBOC.