Eurozone debt concerns for the countries of the periphery keep making headlines and expectations of some sort of European Union intervention are escalating. The big question is if Ireland will eventually have to tap for EU aid any time soon. Last Tuesday an Irish opposition spokesperson went as far as saying that it could even happen within the next 24 hours. While the Irish government does not seem very keen to go down that road, pressure is expected to mount on Ireland to end this uncertainty.
With attention back on the eurozone debt, apart from Ireland, the ability of other countries to deal with high debt and low growth starts being questioned. If Ireland files for aid, Portugal seems to be the next most vulnerable candidate. The risks attached already start to reflect in the latter country’s risk premiums.
Even though Portugal’s debt is not as bad as Ireland’s – the austerity measures embarked upon combined with an already sluggish growth may jeopardise its ability to service its debt. Analysts point out that Irish problems are not the same as Portugal faces. Irish troubles stem from fears that the Irish banking sector could weigh heavily on Ireland’s debt bill while Portugal must deal with a loss of competitiveness, but has so far preserved the integrity of its institutions.
EUR/USD trading, early this week, was in the range of 1.3561-1.3750 with a marked decline on Monday. RTFX Trader Tip’s projected scenario for the week sees the EUR/USD not going lower than 1.3633/1.3482 and after the bearish move down the pair should attempt to reclaim the 1.3889/1.3994 levels. Up till early this week RTFX Trend was bearish, with a possible change of trend expected if price goes beyond the 1.3918.
Apart from the weakened euro, US dollar support this week was seen stemming from a rise in US Treasury yields as investors sold US treasuries (on improving US economic data and as the Fed’s bond buying programme came under attack) and also covered their previous short USD positions. The fact that yields stand at three-month highs (just below three per cent) has attracted demand for US assets and also for the US dollar.
Given the amount of criticism both globally and also from Republican ranks aimed at the Fed’s large scale, asset-purchase programmes, New York Fed President William C. Dudley came out publicly in its defence. He hit back at those critics accusing the US of trying to artificially weaken the US dollar – saying that the Fed is trying “to remove treasuries from the market and force private investors into other assets.”
He went on to say that QE2 is simply trying to avoid a double-dip recession and is aimed at helping the economy through lower interest rates for the benefit of consumers and businesses. Mr Dudley also mentioned that even though monetary easing tends to lead to that nation’s currency to depreciate, it does not always have to be the case.
Chinese inflation reports issued last week and speculation that China may engage in some form of tightening weighed on Asian trading. Even though Japan reported better than expected Q3 GDP (0.9 per cent actual vs 0.6 per cent expected) last Monday the good news was dampened by Economy Minister Banri Kaieda’s rather negative comments, where he attributed the expansion to a temporary rise in consumption and said that the Japanese economy remained weak.
USD/JPY trading opened the week at 82.48 and marked a rise after reaching lows of 81.66 last Friday. In fact, the pair had reached highs of 83.33 up to the time of writing. Mentioned high is, in fact, in line with the 83.31 resistance level that was expected in the RTFX Trader Tip’s weekly scenario.
RBA minutes released earlier this week kept the door open for tightening, but investors shouldn’t expect it anytime soon. In fact the RBA said that its recent decision to hike the rate was finely balanced, and that there could have been valid reasons for postponing the last hike; among which is a stronger AUD, current CPI and subdued credit growth – the bank however ultimately had chosen to be forward-looking on inflation and hiked the rate by 25bp.
Upcoming FX Key events:
Today: UK Retail Sales, US Weekly Jobless Claims & US Philadelphia Fed Business Index.
Tomorrow: German PPI & US Fed Chairman Speech at ECB Conference in Frankfurt
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.
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Mr Muscat is senior trader at RTFX Ltd.