Negative news at week’s start escalates risk aversion

Weekend news and events soured risk sentiment at this week’s open and throughout Monday’s trading. Much of the negativity came from eurozone related concerns. The Spanish ruling Socialist Party suffered great losses in regional elections last Sunday, while Italy was unexpectedly placed on a negative outlook by Standard & Poor’s, although its long term credit rating was still maintained at A+.

Lastly but definitely not least the Greek situation continued to escalate as media reports reported that Greece had just enough cash to go through until July 18 and that the IMF suspended its quarterly review until more austerity and privatisation plans were drawn up. In addition more volcanic eruptions were reported in Iceland.

Data out of the eurozone was slightly disappointing earlier this week – the PMI (Purchasing Managers Index) numbers released were flash figures for the month of May from the eurozone, France and Germany. Actual figures were lower than previous figures and for most of the cases even below expectations. The lower than expected eurozone PMI figures raised questions about the prospects and resilience of economic growth.

However the French services sector in particular managed to show resilience as figures reported where only marginally lower than the previous figures and in fact the actual figure reported of 62.8 managed to beat the expected 62.1.

The escalating risk aversion sent the EUR/USD tumbling lower, and the price traded for the currency pair broke below the 1.4000 levels for the first time in nearly two months. Despite the interest rate differentials that have given support to the euro, when compared to the US dollar – the escalating debt concerns kept haunting support for the euro. Traders reported bids for the single currency by Asian central banks and it was these bids that probably helped to halt the EUR/USD’s descent.

The euro also suffered substantial losses against the CHF. The EUR/CHF recorded new lows below the 1.2400 level and the pair went as low as 1.2324. The turmoil over eurozone debt concerns contrasted against the Swissie’s safe haven appeal.

The CHF strength eased slightly the following day after Swiss National Bank vice chairman Thomas Jordan’s comments revealed concerns that the Swiss franc’s strength risked triggering deflationary pressures; however he added that so far the export sector remained resilient, but the SNB would act if these deflationary risks were to materialise.

Last Tuesday euro selling saw some easing and the euro managed to limit its losses even though credit rating agency Fitch affirmed Belgium’s credit rating at AA+ but lowered its outlook to negative.

On a daily time frame Elliott studies are suggestive of a continuation of this correction lower in the near term and even if the EUR/USD has up to the time of writing been held by support at the 100-day moving average at 1.3969, we could be in for a move towards or in the region of the 200-day moving average at 1.3678.

The British pound remained weak in the early part of the week even if euro weakness on Monday sent the pair towards daily lows of 0.8664. In the earlypart of the week the GBP was down 0.37 per cent against the rest of the majors.

UK data released in the latter part of last week saw the claimant count for the month of April rising drastically higher to 12,400 from the previous 700 and expected no change. Despite this data the ILO unemployment rate for the month of March, however, managed to inch slightly lower to 7.7 per cent from previous and expected 7.8 per cent. April retail sales were good and actual figures managed to beat the forecasts.

Our RTFX Trader Tip (EUR/GBP) envisages a correction lower to possibly 0.8633 throughout this week, but warns that given the technical setup of the price trading. Market could break side, earmarking 0.8845 and 0.8682, as possible points of acceleration if these levels are clearly breached.

Despite a sell off during the Monday session, the antipodean currencies, namely the AUD and the NZD managed to stage a recovery throughout the Tuesday session – after the losses incurred the previous day. On Monday the escalating risk aversion caused investors to cut those positions perceived as riskier, and the Aussie and the Kiwi were at the losing end. The NZD in particular managed total gains of around seven per cent against the majors on the back of higher than expected figures for RBNZ’s two-year inflation expectations.

Upcoming FX key events:
Today: US GDP preliminary & Quarterly PCE core, and German Import Prices.
Tomorrow: EZ Sentiment, German Retail Sales & CPI and US Michigan Consumer Sentiment & Monthly PCE core.

FX technical key points:
EUR/USD is bearish, target 1.3700, key reversal point 1.4650.
EUR/GBP is bearish, target 0.8580, key reversal point 0.90500.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.8500, key reversal point 0.9300.
AUD/USD is neutral.
NZD/USD is neutral.

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Mr Muscat is senior trader at RTFX Ltd.