Last Sunday Irish Prime Minister Brian Cowen announced that Ireland had made a formal request for aid from the EU and IMF. Although details still had to be concluded at the time of writing, the Irish Finance Minister indicated that aid should not exceed €100 billion, and it was to be sourced from the European Financial Stability Facility (EFSF) plus bilateral loans from UK and Sweden.
This news helped ease the uncertainty that surrounded the event – news was initially positive for the single currency and it also helped trigger a return of risk appetite. But investors’ initial euphoria (for striking off an item from the uncertainties’ list) soon faded as another concern gained the limelight. Fears of contagion erased all initial positivity and investors started asking themselves whether Portugal and Spain would follow Ireland – and how would the rest of the eurozone countries manage to foot this debt bill.
A recent guesstimate for a possible rescue package for Spain was in the region of €500 billion. While we are not saying that we will come to such a situation (in fact, we hope not), if there is something financial markets have taught investors these past years it is that nothing is impossible, and “too big to fail” sounds like nonsense nowadays.
During the previous rescue package (for Greece), analysts had described terrifying possible worst-case scenarios – scenarios that depicted a eurozone breakup. One should also add that analysts did not deem such scenarios as probable, but they certainly seem viable options in times of turmoil.
What brings a country to its knees? In our weekly commentary dated May 20, 2010 – we described the workings of “bond vigilantes” as follows: “Vigilantes are the bond market’s heavyweights, namely hedge funds, mutual and pension funds and other institutional investors, who have the power of demanding more payment for holding the bonds of those countries with a shaky fiscal situation.
“This demand for increased payment is visible in yields, which rates reflect a country’s risk and higher yields, and makes it more costly for a country to tap for liquidity. These vigilantes work faster than rating agencies and push trading at levels to better reflect risk exposure.”
These financial market vultures prey on the weakest countries making even a nation’s government powerless in such situations. Hopefully, if global growth consolidates, one should expect these fears to gradually ebb away. The EU now finds itself pressured to come up with a generic approach to such situations as opposed to this piece-meal approach.
EUR/USD open this week was at 1.3743, and at the time of writing is currently trading close to lows of 1.3458. The pair found resistance around the 1.3786 for the earlier part of this week. Technical studies seem to suggest that a decisive break of the 1.35-1.36 region will eventually tend towards the 1.33 levels.
The British pound gained support against the euro, on the back of a weakening euro but also thanks to the recent flow of data showing some encouraging signs from the UK economy. The better data has made the possibility of the Bank of England engaging in more monetary easing less of an immediate problem. Earlier this week EUR/GBP trading was approaching a recent seven-week low at 0.8450, level which has provided support for the pair throughout most of November.
Apart from eurozone contagion fears weighing on investor sentiment this week, news of North Korean attacks on South Korea raised risk aversion as well. This risk aversion was visible on major equity indices from Asia to Europe and even the US. News of the tensions between North and South Korea reflected in a bout of JPY weakness, given Japan’s geographical proximity.
On Tuesday, after the news, the USD/JPY rallied to highs of 83.85 in a couple of hours – however the move was short lived and the USD soon pared its gains against the JPY. For most of the earlier part of this week USD/JPY trading was in the range of 83.23-83.56.
The NZD registered losses on news that, the rating agency Standard & Poors had downgraded the outlook on New Zealand’s foreign currency rating to negative from stable. Against the USD, the kiwi traded from highs of 0.7836 down to lows of 0.7650, up to the time of writing.
Upcoming FX Key events:
Today: UK CBI Distributive Trades & French Consumer Confidence
Tomorrow: EZ Private Loans & EZ M3.
FX Technical Key points:
EUR/USD is bearish, target 1.3100, key reversal point 1.4300.
USD/JPY is bearish, target 79.50, key reversal point 90.00.
GBP/USD is bearish, target 1.5300, key reversal point 1.6300.
USD/CHF is bearish, target 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.