Risk appetite was broadly supported at the start of the week mainly as markets reacted to a speech by Federal Reserve chairman Ben Bernanke at a summit in Jackson Hole, Wyoming, last Friday. Despite not promising any further monetary easing, Bernanke announced that the length of the next Federal Open Market Committee meeting will be extended to two days, giving policymakers more time for a “fuller discussion” of available options for further easing.
The Fed chairman also said that the Fed has a range of tools at its disposal to stimulate growth, which it will use appropriately. He also confirmed a view of reaccelerating growth before year end. Investors took the fact that the meeting will be extended to two days as a clear hint that they will embark on another bout of quantitative easing.
Risk sentiment was also boosted by news that Hurricane Irene caused less havoc then initially feared and was downgraded to a tropical storm by early Monday morning. Strong US consumer spending and personal consumption expenditure indicators also lifted the mood and equity markets closed on a buoyant note on Monday.
Commodity-linked currencies ended the previous week extremely bid following Bernanke’s speech and continued to be supported at the start of this week, while ‘safe-haven’ currencies such as the Swiss franc and the yen came under pressure. The euro also found support and traded higher to a two-month high versus the dollar on Monday.
The Swiss franc was under pressure across the board at the start of the week as expectations that the Swiss National Bank will continue to take measures to counteract the franc’s strength weighed on the currency. The swissie has dropped sharply since trading close to parity versus the euro, after the Swiss National Bank slashed its interest rates to zero and increased supply of the franc.
In a weekly update issued on Monday, the Swiss National Bank announced the amount of sight deposits held at the central bank by commercial banks averaged CHF189.037 billion, reaching close to the CHF200 billion target. The Swiss National Bank should be fairly satisfied with the recent rebound in EUR/CHF, to above 1.1900 and its recent uptrend.
EUR/USD traded to 1.4549, its highest since hitting 1.4578 on July 4. The single currency pared its gains on Tuesday, as weaker than expected demand for Italian debt shifted some attention back on periphery concerns, with quarrels over the terms of the Greek bailout already weighing on the currency.
Forex investors focused on a disappointing Italian seven and 10-year debt auction and divisions among eurozone members on how to tackle debt problems. Data also showed on Tuesday that sentiment was down in all sectors of the economy in the eurozone in August. Consequently risk sentiment soured throughout the European session on Tuesday.
EUR/USD fell to 1.4385 by the time of writing, with forex traders citing a series of stop-losses hit on the way down accelerating its fall. RTFX TraderTip suggests the pair should remain range bound between 1.4383 and 1.4556 for the rest of the week and a break of 1.4615 is needed to confirm a breakout.
The euro was down on the week versus its major rivals, most notably against commodity-bloc currencies. It was down almost half a per cent versus the greenback, almost two per cent versus the New Zealand dollar, 1.3 per cent against the Aussie and around 0.8 per cent versus the Canadian dollar.
Peripheral debt worries came back into the limelight on Monday after Reuters reported a detailed proposal brought forward by Finland, concerning its demand for collateral in exchange for providing more aid to Greece. This demand by Finland ignited a chain reaction with Austria, Slovenia, the Netherlands and Slovakia all asking for similar treatment.
By the time of writing, the attention was predominantly on the Fed’s Federal Open Market Committee meeting minutes which were scheduled to be released at 20:00 CET on Tuesday. Investors were looking for more clues on whether the Fed will initiate a new round of quantitative easing which would ultimately weaken the dollar but probably boost stocks and higher-yielding currencies including the euro.
The US jobs data scheduled for tomorrow at 14:30 CET will also shed more light on the Fed’s next moves, as a downbeat jobs report would turn the heat on the US central bank.
Upcoming FX key events:
Today: EZ PMI Manufacturing, Swiss GDP, German GDP & US ISM Manufacturing.
Tomorrow: EZ PPI, US Non-Farm Payrolls, US Unemployment Rate and US Private Payrolls.
FX technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bearish, target 75.50, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is bearish, target 0.7000, key reversal point 0.8500.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.