Euro Calm on Stress Test, Rousseff to Win

The highlights of the ECB/EBA stress test were largely leaked and the market hardly reacted in early trading but that likely won't last. The other news is that Rousseff appears headed to a narrow victory in Brazil's election. Weekly CFTC data showed a large drop in yen shorts. Our Premium trades include USDCHF, GBPUSD, AUDUSD  & NZDJPY. A new set will be issued on Tuesday ahead of Wednesday's Fed decision.

The Australian dollar is the early leader while the yen lags but overall moves have been limited to 15 pips. The euro is barely changed from opening levels near 1.2675.

The ECB stress tests were encouraging. 25 banks failed as of the Dec 2013 test date but including actions taken since then or planned for the immediate future, just 11 banks failed and the total capital shortfall is a miniscule 7 billion euros.

There are some caveats as the methodology faces criticisms like including goodwill and deferred tax assets – two things that would be little help if a crisis hit. Overall, however, we think that European bank stocks will react positively to the news.

It's also good news for the euro but it still leaves many questions about whether bank loan availability and demand, nevermind the endless questions about the strength of the economy. Traders still overwhelmingly want to sell bounces in the euro.

In emerging market news, Brazilian President Rousseff appears headed to re-election with a 51-49% win over Neves. The domestic market won't like a Rousseff win or the narrow margin of victory and that could have some minor spillovers to the risk trade.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -159K vs -155K prior

JPY -72K vs -101K prior

GBP -4K vs -3K prior

AUD -32K vs -30K prior 

CAD -22K vs -16K prior

CHF -18K vs -17K prior

NZD -2K vs -2K prior

The only notable move was in the yen and it showed a very skittish market. As shorts begin to pile back in that could be the basis for a fresh challenge of 1.10 in USD/JPY.