Once the Federal Reserve’s plans for further easing were unveiled, the greenback enjoyed renewed support earlier this week. With the investors’ limelight away from the US’s second round of QE, eurozone debt problems might be attracting some of the investors’ focus again.

Irish newspaper reports throughout Sunday and Monday questioned Ireland’s ability to raise money from international investors next year and raised doubts whether Ireland would be able to service its debt bill. The renewed Irish concerns, however, started off last Thursday, after Ireland announced further plans to intensify spending cuts and tax increases to be able to better control a gaping deficit.

These doubts over Ireland caused 10 year Irish/German bond yield spreads to widen. The spread measures the difference when comparing the price demanded by debt holders for holding 10 year Irish bonds as opposed to the price demanded for holding the 10 year German ones.

Irish jitters also triggered a new rise in the borrowing costs for Spain, Portugal and Greece, as investors’ fears on the eurozone countries mostly at risk, re-emerged.

The 10-year Greek/German bond yield spread eased slightly on news that the party in government managed to attract what it said to be a sufficient backing to avoid a general election - this helped ease some of the investors’ fears.

Earlier on this week, Greek elections attracted investor attention, after the current Prime Minster George Papandreou had said last week that if his party scored poor results in the local municipal polls, he could dissolve Parliament and call a snap general election – barely a year after his appointment. The prospects of snap general elections generated significant uncertainty, but the Greek PM needed a further mandate to embark on the major budget cuts agreed upon in May.

Mr Papandreou eventually ruled out the general election on the back of indications that his party was ahead in seven out of the 13 regions, even though it was reported that around 40 per cent of the voters abstained and 10 per cent of the cast votes were in fact considered invalid.

EUR/USD dived lower after last Thursday’s high at around 1.4280 reaching lows at the 1.3824 level (up to the time of writing) in a few days. Traders are expecting the pair to trade in the range of 1.38 to 1.40 throughout this week. In the light of the euro’s rally last week, since the single currency is effectively not without a taint, it was being expected that the eurozone debt problems would act as a cap for more upside.

Similarly the USD recovery will also be capped at some point, because of the Fed’s renewed monetary easing policy (even though it’s out of the way now) but also because, ahead of the G20 summit this week, investors might choose to be cautious.

This week’s G20 summit is mired with exchange rate issues, and global talk of economic balances. In addition, the latest bout of US monetary easing seems to be generating significant opposition amongst the rest of the G20 countries. The US easing is seen as having significant global repercussions. A weakening dollar could trigger a rise in commodity prices, and also lead to a significant amount of cash to flow into emerging markets for example.

If G20 leaders are unable to find some sort of common ground, this could possibly mean more turmoil for an already vulnerable world economy.

In the meantime data from the eurozone earlier this week revealed stronger than expected German exports (3.0% vs -0.4% expected), a better than expected Eurozone Sentix Index (14.0 vs 9.5 expected) and worse than expected German Industrial production (-0.8% vs 0.5% expected). Despite the good German exports data, euro trading seemed to be led only by the poorer industrial production figure and the negative Irish reports.

Figures released last Tuesday for the United Kingdom showed that Industrial production grew at 0.4 per cent (in line with expectations) but the manufacturing component came at 0.1 per cent slightly lower than what was expected.

Gold and silver managed new highs at $1,422.35 per ounce and $28.56 per ounce respectively, up to the time of writing. The two metals pushed higher irrespective of the higher US dollar, as a combination of inflation fears (on the back of US QE2), eurozone debt worries and the general uncertainty clouding currencies, took the lead.

Upcoming FX Key events:
Today: G20 Summit in Seoul, South Korea.
Tomorrow: G20 Summit in Seoul, South Korea, French GDP, German GDP, EZ GDP & US Michigan Confidence Preliminary.

FX Technical Key points:
EUR/USD is neutral.
USD/JPY is bearish, target 79.50, key reversal point 90.00.
GBP/USD is neutral.
USD/CHF is bearish, 0.94, key reversal point 1.02.
AUD/USD is bullish, target 1.04, key reversal point 0.8900.
NZD/USD is bullish, target 0.82, key reversal point 0.72.

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

www.rtfx.com

Mr Muscat is senior trader at RTFX Ltd.

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