Short-term relief or long-term concern?

The euro started off positively on Monday rallying to the highest level since mid-March. The single currency found support after details of the long-awaited standby rescue package were released. EU leaders offered a joint pledge for the amount of €45 billion (of which €30 billion are from the EU and €15 billion from the IMF) to bail out Greece, should the need arise.

In addition, this pledge came at around five per cent for a three-year loan which is higher than the IMF lending rate but well below the current market rate. However most of this enthusiasm started to weaken later during the day. On Tuesday morning the euro positioned lower against the US dollar as all eyes were on the first Greek bond auction, where Greece was set to sell €1.2 billion in 26- and 52-week bills to fund its budget deficit. This would gauge market's appetite for Greek debt.

In essence, the FX market seemed quite undecided, as it tried to balance the short-term relief and the long-term concern in regards to Greek issues, which translated in the absence of a clearly defined trend, despite the euro being slightly bearish against the US dollar on Monday. Another factor that will probably keep weighing on the euro is the election next month in the German state of North Rhine-Westphalia and the fact that the ruling coalition will not pass any Bill before this election.

Despite the fact that quite a good number of data releases were expected for this week, it is unlikely that they prove to be market movers as their importance is relatively low. The US dollar lost ground against most of its major counterparts as investors raised their appetite for risk, and the reserve currency is likely to face increased volatility over the following week as the economic docket is expected to reinforce an improved outlook for future growth.

The ongoing imbalances in public finances could hamper the long-term outlook for the greenback as the nation's credit rating remains at risk.

Nevertheless, as risk trends continue to have an impact on the currency market, positive economic developments in the US could encourage an improved outlook for global growth and lead market participants to seek higher yielding investments.

In the UK, retail sales surged by 4.4 per cent in March, as reported from the British Retail Consortium (BRC), however, this announcement came with a note for caution from BRC director when interpreting this figure. He noted that even though figures reported were the best total sales growth since April 2006 - the fact that Easter started off in March rather than in April when compared to the previous year might have inflated the figure. Another report from the UK came from the Royal Institution of Chartered Surveyors that reported a weakening of UK House Prices.

Following a draft by a group of lawmakers from the ruling Democratic Party of Japan, the Japanese yen slid against the dollar on Tuesday and other currencies on comments that the USDJPY should tentatively be kept at around 120 yen. The group also urged the government and Bank of Japan to use all monetary and fiscal policy tools to eradicate deflation. Proposals are meant to be submitted to party executives for the possible inclusion in the party's campaign for upper house elections expected in July.

Marketwatch reports that China's foreign-exchange regulator added to evidence that the country would not change its currency policy anytime soon. Dow Jones reports that State administration of foreign exchange also repeated plans to keep the Yuan stable. These remarks came as Chinese President Hu Jintao was quoted as saying Beijing would stick to its own path on currency reform, despite pressure from US and elsewhere and that reforms on the nation's currency exchange rate will be based on China's own economic and social interests.

Reuters reports the Asian Development bank (ADB) as saying that Asia and Pacific economies a diverse group of 45 economies including China, Azerbaijan, India, Singapore and Papua New Guinea are recovering strongly from last year's slow down and should coordinate on unwinding easy policy and freeing up exchange rates. Asian economies are set to grow 7.5 per cent in 2010 and 7.3 per cent in 2011, picking up from 5.2 per cent in 2009.

As reported by Reuters, ADB said that Asia has weathered the global financial crisis better than most regions, and thus faces new risks. The region is attracting large capital flows due to its early recovery, and volatile capital flows could again have serious implications for exchange rates and money supply.

Quick return to high growth could accelerate the increase in consumer and asset prices. The ADB said more flexible exchange rates would help manage capital flows, and that carefully designed capital controls to mitigate disruptive capital inflows are quite acceptable in the short run during the transition to greater flexibility.

Upcoming FX Key events

Today: US Industrial Production.

Tomorrow: Eurozone CPI, US Housing Starts, US Building Permits and US Michigan Confidence.

FX Technical Key points

EUR/USD is bearish, target 1.3100, key reversal point 1.4200
USD/JPY is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.4750, key reversal point 1.5700
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650

Mr Bovay is senior trader at RTFX Ltd.

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