European Woes Continue, Euro Specs Slashed

The crisis in Europe seems to have taken another step toward disaster as rumours and dissention among leaders push Greece toward the brink. The euro fell badly on Friday and continued to decline as markets opened for the week. Fridays CFTC report showed the market turning deeply bearish on the euro.

The early laggards on the week are the risk-driven AUD and NZD with EUR close behind. GBP is narrowly outperforming JPY and USD at the top of the chart. US stocks fell nearly 2% on Friday and futures are pointing to an additional 0.8% decline at the open.

A positive solution in Greece appears increasingly hopeless. Greeces future is a choice among various negative options; whether it be a restructuring within the eurozone or exit from the monetary union. Whats abundantly clear is that Greece cannot afford the political/social cost of a bailout from its neighbours, nor will it be possible to return to international borrowing markets.

Greek credit default swaps blew out on Friday on a rumour that officials will announce an exit from the Eurozone on the weekend. While this did not come to pass, a restructuring now appears to be a near-certainty with Greek CDS implying a 90% chance of default. Greeces economy cannot grow under the burden or austerity and it cannot afford to pay its debts without it.

The EUR charts tell the whole story. A clear breakdown is visible. Even with a bounce in the day or week ahead, its clear that the direction is down and that the trade will be to sell rallies.

Adding to the impossibility of finding a positive solution, European leaders appear increasingly divided. Finland and others continue to bicker over collateral but on Friday the market was hit with a shock as Bundesbank President and ECB governing council member Jurgen Stark announced his resignation. The official line is that he is leaving for personal reasons but a convincing amount of innuendo in the market points to a strong disagreement about Eurobonds as the culprit.

The market is no longer debating if Greece will default but what will happen when it does. A Bloomberg report on Saturday suggests three of Frances largest banks will have their credit ratings cut as soon as this week because of exposure to Greek sovereign debt. German leaders appear to be attempting to build a firewall around German banks. Greek leaders took further steps including a special property tax and used soothing words but the market has stopped listening.

CFTC Report

Fridays Commitment of Traders report showed the euro net plunge to -36,4K from +2.5K the previous week. Its the most bearish futures traders have been since Jan. 11 and they were rewarded as EUR fell sharply since the data was collected on Sept. 5. Interestingly, the data was collected the same day as the SNB announced the EUR/CHF peg. The net fell only from +9.3K to +7.5K. GBP is the only other currency held net short as the position fell to -13.2K from +0.4K. The declines from positive to negative in EUR and GBP are normally interpreted as sell signals. CAD longs may be poised for a similar switch as they fell to +2.1K from +13.9K. Yen longs fell from 32.8K from 41.1K. AUD and NZD longs were essentially flat.