The week started off negatively for the eurozone, as on Monday morning Moody’s rating agency cut Ireland’s credit rating by one notch to Aa2. The agency warned of the country’s weak growth, as the cost of rescuing its banking sector keeps growing. Moody’s also changed the country’s outlook to stable from negative.
On the positive side, Ireland has raised enough bonds to keep it going until first quarter 2011 and does not face any major bond redemptions this year.
In the midst of the downgrade of Irish debt, and Hungary’s failure to reach a funding deal with the IMF and the EU, the euro managed to float higher than the 1.30 level against the US dollar earlier this week.
Investors seem to have focus only for the upcoming stress tests tomorrow and as weaker US economic data continues to flow, markets are no longer comfortable with large short euro/long USD positions – and resort to short covering to reduce their euro short positions, this in turn pushes the price for the euro/US dollar up.
We think that this trend should continue until the much anticipated release of stress tests for the European banks. The outcome will be closely eyed and whether or not stakeholders are satisfied with results should have a bearing on the euro’s support.
The news that Hungary failed to please IMF or the EU impacted the sale of three-month treasury bills which came due a day after the news was making headlines. Hungary managed to sell 35 billion Forints compared to the projected 45 billion. Even the yield paid rose to 5.47 per cent from the 5.28 per cent paid in the previous auction, just about a week ago.
The continuing US dollar weakness is dominating markets, and is close to reaching November 2009 lows at 84.81 when seen against the Japanese Yen; the pair is currently trading at 86.88 at the time of writing earlier this week.
Even the USD/CHF keeps losing ground shedding approximately another 2.7 per cent during July to date. When seen against the British pound, the US Dollar lost 1.7 per cent this month to date as well.
As previously noted, the inability to consolidate positive economic data from the United States, and the discounting of the US dollar as a safe haven keeps weighing on the US dollar.
Data released earlier this week was disappointing as UK public borrowing unexpectedly rose when compared to the same time a year ago, while economists were forecasting a fall to £15 billion compared to the actual £20.9 billion. This disappointing figure comes exactly after the introduction of the government’s austere budget last month and it goes against hopes that the fiscal position was on the way for improvement. Immediately after the release, sterling was losing ground, to later recover most of the lost support, when seen against the euro.
Days after China’s economic release showed a slowdown in economic growth, Chinese premier Wen Jiabao says that everything is proceeding according to plan. Wen emphasised the importance of fostering a growing domestic demand and the need for stabilisation of foreign demand. Analysts are viewing these comments as indicating the government is satisfied with the slowdown, but most importantly it might be pointing to no more government stimulus for the near term.
In a statement released Tuesday, the Chinese Ministry of Commerce expressed concerns that fiscal austerity as opposed to fiscal expansion from many European countries might possibly translate in limited growth for Chinese exports. It also went on to say that this is expected to reflect negatively on growth for the second half of the year.
Australia shifts to ‘wait-and-see’ mode as Julia Gillard, Australia’s recently appointed prime minister from the ruling Labour Party, announces August 21 elections. Polls seem to tilt slightly in favour of the Labour Party, but it seems there is no clear cut difference at the moment.
Economic analysts have expressed themselves indifferent to which party wins as it is not expected to derail the economy’s general path – both parties are committing to a budget surplus and taxes are expected to rise in one way or the other, independent of which party wins. Minutes from the RBA monetary policy meeting described the economy as experiencing a transition from public to private demand, and acknowledged a moderation of Asian economic growth which it described as desirable after all. The RBA also hinted that they were expecting the economy to remain well supported despite slowing Chinese demand.
Upcoming FX key events:
Today: EZ consumer confidence; UK retail sales and US existing home sales
Tomorrow: ECB stress test results; UK GDP and Canadian CPI.
FX technical keypoints:
EUR/USD is bearish, target 1.1850, key reversal point 1.3000.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4000, key reversal point 1.5500.
USD/CHF is bullish, target 1.2000, key reversal point 1.0500. A
UD/USD is bearish, target 0.7800, key reversal point 0.9100.
NZD/USD is bearish, target 0.6200, key reversal point 0.7250.
Mr Muscat is senior trader at RTFX Ltd.
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