From late last week until Monday, the euro continued to enjoy support (support dating back to June 8), this support was, generally speaking, the result of an increased appetite for risk. Possible contributors to this appetite for risk were: the SNB's bullish outlook that helped to sustain the possibility of continued global economic growth; Spain's debt auction towards the end of last week that went well; and the fact that the United Kingdom retail sales figures came out stronger than expected.
A pledge for the transparency of the bank's stress tests from the eurozone as well kept feeding this positivity (the results of which should be available next month).
Moreover, last Thursday, ECB council member Axel Weber told a conference in Frankfurt that the eurozone had solved its state solvency problem. Mr Weber explained that by the end of summer, the European Union and IMF would have secured enough funds to cover the debt of the eurozone's most vulnerable states - namely Greece, Portugal, Spain and Ireland. All this explains the support for the euro.
Interesting to note that last Thursday's poor US jobless data and low inflation figures would have previously been the source of concern for the prospects of global economic growth this would have soaked away risk appetite and would have triggered a decline in riskier assets like the euro. But in contrast the euro managed to secure its previous gains and closed the day even higher. The recent bullishness could be suggesting that, at least for the time being, the euro was unattached to the debt problems. The medium to longer term view for the EUR/USD pair remains bearish however.
Throughout last weekend China announced it would be depegging the Yuan from the US dollar, adding that they would proceed to further reform and increase flexibility of the Renminbi exchange rate regime. This was well received by the markets. Asian indices were positive early Monday morning and even the euro managed to climb to levels it had not seen since last May - levels it could not maintain too long however, as last Monday it closed below its open against the US dollar.
US exporters were quoted as saying, that the increased flexibility would improve competition with Chinese companies, and that the move would help reduce the United States' trade deficit.
Given that the debt burden has been a predominant issue for most of this year, analysts keep seeing a future strengthening for those countries with better fiscal positions. Within this context the focus falls on the Swedish Krona (SEK) and the Norwegian Krona (NOK). The fall in risk aversion throughout most of this month to date has also translated well for currencies like the SEK and NOK.
Both the SEK and NOK have, till now, been at the mercy of risk sentiment rather than moving in line with the underlying fundamentals. The strong fiscal position of these two countries should be supportive for both the SEK and NOK. Norway, in particular, since it is a major oil producer, has been experiencing increasing wealth - enough to cushion for any future government spending.
If we assume a continuation of this reduced risk aversion in the future, a currency like the yen that gains much support from the unwinding of carry trade positions held in higher yielding currencies (i.e. NOK, AUD, NZD), might in the medium to long term, experience reduced support - because funds would flow back to these higher yielding currencies on the back of improved economic optimism. Other arguments pointing towards a future reduced support for the yen are the fiscal burden the country has and the fact that the recently appointed Prime Minister has come out in favour of a weaker yen to help soak up the budget deficit.
Meanwhile, in the United Kingdom, British Chancellor of Exchequer George Osborne put forward his Budget statement to Parliament on Tuesday. The Budget was aimed at addressing the country's deficit and was a mixture of tax and other spending cuts. Economists have expressed concerns on the risks of the United Kingdom falling back into recession if the tighter fiscal measures are too fast. The British pound was losing against most of its major counterparts early Tuesday morning, on the back of the country's deficit and on the prospects of an accommodative monetary policy to cope with uncertain growth.
In Switzerland, comments by the SNB vice chairman that the central bank has no intention to intervene for now - provided support for the Swiss franc and pushed it to new highs against the Euro earlier this week.
In a conference last Tuesday, South African President Jacob Zuma expressed confidence that the World Cup would be boosting job creation and economic growth in South Africa. He went on to say that the event itself created so many new opportunities in his country that GDP was bound to reflect this growth.
Upcoming FX Key events
Today: US Durable Goods orders.
Tomorrow: US GDP annualized, French GDP, US Michigan Consumer sentiment.
FX Technical Key points
EUR/USD is bearish, target 1.1650, key reversal point 1.2450.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4000, key reversal point 1.5000.
USD/CHF is bullish, target 1.2000, key reversal point 1.1000.
AUD/USD is bearish, target 0.7800, key reversal point 0.9000.
NZD/USD is bearish, target 0.6200, key reversal point 0.7150.
Mr Bovay is senior trader at RTFX Ltd.
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