Last Monday risk sentiment continued to sour and risk aversion heightened after Standard and Poor’s cut the United States’ ‘AAA’ rating to ‘AA+’ late last week, S&P’s also warned that it could take further action in the next two years. The G7 pledged coordinated efforts to ensure liquidity and general financial market stability; even the ECB came out saying that it would actively implement its bond buying programme.
Previously, last Thursday the ECB had left its policy rate unchanged at 1.5 per cent and had already sounded more dovish when it announced it would adopt new liquidity operations for the next six months.
The US downgrade overshadowed completely Friday’s better than expected US Non Farm Payrolls. In its first reaction after the downgrade the US equity markets sold off aggressively – the Dow Jones industrial average slipped below the 11’000 psychological level shedding 5.55 per cent, even the Nasdaq and S&P 500 suffered losses of similar magnitude.
In the forex and commodity markets money flows have supported the “safer” options; namely Swiss franc, Japanese yen, the USD and gold. The price for gold breached $1700 during Monday’s session and continued to push to highs (at the time of writing) of $1779.55 in the day that followed. Gold gained around nine per cent since month start; most of these gains were attained solely throughout trading in the former part of this week.
Earlier this week both the USD/CHF and the EUR/CHF slipped to fresh record lows as the Swiss franc continued to garner support on the back of the heightened risk aversion and uncertainty. The USD/CHF traded in the range of 0.7361-0.7651 and the EUR/CHF traded in the range of 1.0479-1.0992. Even against the yen the USD suffered. The USD/JPY continued to fall lower as the JPY gathered support.
The currency pair traded in the range of 76.99-78.47 in the former part of this week, eyeing the recent lows of 76.30 reached on 1st of August.
Against the euro the USD was initially weaker at the start of the week but recovered gradually after. The euro was initially supported by the ECB’s statement indicating it would resort to bond buying in relation to Spanish and Italian debt, but the effect of this soon fizzled out.
The ongoing strength of the “safer” currencies is raising expectations of possible central bank interventions.
The Bank of Japan has already intervened in the forex markets around mid week, last week and increased the size of its asset purchase facility to 50 trillion JPY from the previous 40 trillion JPY – after repeatedly reiterating its vocal warning that it was watching forex markets very closely.
Even the SNB is planning to take action to attempt to react to the Swiss franc’s strength. It has lowered its three-month Libor target towards the lower end of the target range of 0.0-0.25 per cent, and aims to boost Swiss money markets with liquidity. In addition the SNB has also said it was ready to take more action if necessary.
So far it is still unclear whether we should expect to see any multilateral efforts, after last week’s intervention the BoJ clarified that in fact it would be a unilateral operation. This brings up the issue of how efficient unilateral interventions can be, given they risk to be overwhelmed and countered by risk haven flows.
Worth noting is GBP’s resilience despite the predominant flight to the traditional safe havens. Since month start the GBP is up around 1.5 per cent against the majors, gaining against the euro and the commodity bloc currencies. For the former part of this week the GBP defended itself and managed to counter any losses with the gains made mostly on the back of the AUD, NZD and CAD.
With the EZ and the US debt stress in the background the GBP has gained some favour on the back of the coherent fiscal consolidation the British government is implementing. Which stands out when compared to the eurozone’s uneven fiscal situation and the US’s recent political deadlock.
Despite this, the currency’s gains have so far remained limited by the most recent worsening industrial and manufacturing production figures released earlier this week and by the worsening trade deficit reported for June. In addition the riots in London also continued to weigh on the GBP’s appeal.
Upcoming FX key events:
Today: Canadian New House Starts and Trade Balance and US Trade Balance.
Tomorrow: US Advanced Retail Sales and Michigan Consumer Sentiment, Eurozone Industrial Production and French GDP preliminary.
FX technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bearish, target 76.00, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is bearish target 0.7200, key reversal point 0.8500.
AUD/USD is bearish, target 0.9800, key reversal point 1.0800.
NZD/USD is bearish target 0.7800, key reversal point 0.8800.
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Mr Muscat is a senior trader at RTFX Ltd.