The euro lacked support early this week, as volumes thinned ahead of year-end. The single currency was held back by the recent bout of downgrades and warnings – Ireland was downgraded last Friday and Moody’s placed Portugal under review for possible downgrade on Tuesday.
The re-emerging background concerns over the situation in the Korean peninsula also helped dampen risk appetite at the start of this week. South Korea launched firing drills on Monday morning and North Korea warned it would strike harder if the drills went ahead, although Pyongyang later said it would not retaliate.
European Council President Herman Van Rompuy confirmed that the current EU Emergency funds available (EFSF) would not be increased, but added that if in the future there was the need to top up, the eurozone was ready to do what was necessary. Analysts expect the euro to remain weak into the new year especially while investors keep expecting more concrete solutions from the eurozone leaders.
The fact that the summit, held at the end of last week, revealed an agreement to set up a permanent rescue mechanism from mid-2013 did not impress investors much.
The euro traded narrowly against the US dollar, mostly contained within a 70-pip range for the former part of this week, though it did reach wider ranges when it gained some support after remarks made by Chinese vice premier Wang Qishan last Tuesday.
Mr Wang said that China supported the measures taken by the EU to stabilise markets. Other Chinese officials were also urging the European authorities to resort to more tangible action to back their talk. The comments did not only spur support for the euro, it also lent support for the other “riskier” assets such as the Australian dollar and New Zealand dollar as well. Up to the time of writing the EUR/USD was supported around the 200-day moving average in the 1.31 region.
Against the Swissie the single currency fell to an all-time low during Monday and Tuesday trading. The unsettling concerns over debt issues in the eurozone contrasted with the “safe haven” CHF and this has favoured the CHF. The EUR/CHF registered lows of 1.2616 at the time of writing; RTFX Trader Tip sees downside capped at 1.2553 and the pair could resume higher levels in the coming days.
In the United Kingdom the media reported that the Confederation of British Industry was expecting the CPI to reach 3.8 per cent in the first quarter of 2011, which is well above the BoE’s two per cent target; the last reading shows that CPI currently stands at 3.3 per cent.
Consequently Interest rates will have to rise in order to address the rising inflation – in the process, even monthly mortgage payments will have to reflect the higher cost. This does not bode well for the British who have already had to face a stubborn inflation and have not seen their incomes grow to compensate for the higher prices.
The EUR/GBP pair reached lows of 0.8446 throughout Monday on the back of a weaker euro but also thanks to the fact that the CBI reports were envisaging higher interest rates sooner than what was being expected – earlier rate hikes usually lend support to the particular currency. However on release of the negative public sector borrowing data on Tuesday the GBP weakened and the pair rose to highs of 0.8514.
The higher UK public sector borrowing data released pushed the sterling lower not only against the euro but also against the USD. The negative data shows how the government is struggling cut its deficit and this puts into question whether the government will be able to reach its pre-set targets.
In Asia, at the end of a two-day meeting the Bank of Japan left rates unchanged at 0 – 0.10 per cent while making no changes to its policy. The BoJ also confirmed it has proceeded with its asset purchases and that these would continue. With regards to the negative core inflation, the BoJ said that while it still remains a problem they are seeing a moderation in the pace of deflation.
Please allow me to take this opportunity to wish you and all your families a very Merry Christmas and all the best for the coming festive season.
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Upcoming FX Key events:
Today: US PCE, US Michigan Consumer Sentiment, US Durable Goods, US New Home Sales & Canadian GDP.
Tomorrow: German Market Holiday & US Market Holiday.
FX Technical Key points:
EUR/USD is bearish, target 1.2900, key reversal point 1.3500.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5300, key reversal point 1.6300.
USD/CHF is bearish, target 0.9400, key reversal point 1.0200.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.