EUR/USD trading was generally bullish up till early this week, even though the pair suffered some corrections. On Monday EUR/USD trading pushed the price for the pair up to 1.3505, which level had only been seen back in April 2010.
This bullish stance is more attributable to US dollar weakness than to euro strength. The USD slid after late last week, in its FOMC meeting the Fed fuelled expectations of possible future intervention to help the economy and to lessen the danger of deflation. The Fed kept rates on hold but expressed concerns over sluggish growth and uncomfortably low inflation, saying it would do more to fight unemployment and the drop in prices.
Gold and silver enjoyed support on the prevailing uncertainty. Gold reached highs of $1,300 per ounce and silver reached highs of $21.62 per ounce. Thursday’s disappointing US jobless figures and the poor data for the Irish second quarter GDP figure that came well below consensus, and showed a decline – helped push the price of Gold to $1,300 level. Gold’s highs highlighted concerns over the US economy and it showed rising concerns over how the Irish banking sector still troubles Ireland.
Even the British pound managed highs of 1.5896 against the US dollar last Tuesday despite a string of poor housing data, the GBP managed to edge up after poor results from a housing survey released late Sunday evening. In all probability this had limited effect because poor housing data had already been priced in. The GBP tracked the euro’s gains on the back of the USD weakness as well.
On Tuesday morning however the US dollar got a breather as reports from the Wall Street Journal said that the Fed was considering a smaller-scale bond buying programme. The brief rally however, did not last very long as a former Chinese central bank adviser was reportedly saying that a devaluation of the US Dollar was inevitable. On the other hand the euro gained some credit as a senior official from the ECB reportedly said some of the emergency support may be withdrawn.
The comments on the possibility of the ECB withdrawing some emergency support managed to reverse concerns about rumoured possible downgrades for Spain and Ireland. Moody’s rating agency had already downgraded some debt ratings on Anglo Irish bank last Monday, saying there was a risk that Dublin might default on lower grade loans issued by the nationalised lender.
Support for the Canadian Dollar eased earlier this week, analysts cited investors as looking for more guidance from economic data. The CAD also suffered as oil, a key Canadian export, fell below the 76US a barrel.
Support for the Swiss franc remained evident even though its strengthening eased against the US dollar, however its weakening seems to be limited by the prevailing general global economic concerns and the possible quantitative easing from the United States. Despite the SNB’s recent decision to keep interest rates on hold, and the accompanying remarkably dovish statement where growth was seen as facing a “marked slowdown” – the swissie remains a traditional “safe haven” currency.
It was reported earlier this week that governments from the European Union are aiming to reach a deal on a bank tax by the end of the year and should also be deciding whether to introduce financial penalties for credit rating agencies. Credit agencies have been heavily criticised for giving high ratings on securitised products which products were a core issue during the financial crisis.
The markets keep benefiting from spasms of risk appetite on the back of some better than expected data such as the release of the German business sentiment index, and also from M&A activity taking place, on the grounds that if there was no confidence in economy these mergers and acquisitions would not take place. It seems that the threat of a double dip has haunted markets to such an extent that investors only need to know there is no imminent double dip threat to ease risk aversion – even though the data released remains mixed and generally pointing to slowing growth.
Upcoming FX Key events:
Today: German Employment, Euro Zone CPI Estimate, Canadian GDP & US GDP Annualized.
Tomorrow: Euro Zone Manufacturing PMI & Unemployment Rate, UK Manufacturing PMI & US PCE & ISM Manufacturing.
FX Technical Key points:
EUR/USD is Neutral.
USD/JPY is Bearish, target 80.00, key reversal point 90.00.
GBP/USD is Neutral. USD/CHF is Bearish, target 0.9600, key reversal point 1.0600.
AUD/USD is bullish, target 98.00, key reversal point 84.00.
NZD/USD is bullish, target 0.78, key reversal point 0.6800.
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Mr Muscat is senior trader at RTFX Ltd.