Over the past seven days, risk appetite has remained predominantly muted. At the start of the week, financial markets opened on a very slow footing, continuing a slide started at the end of last week, as fears of further escalation in the eurozone debt crisis intensified. On Monday, we witnessed broad swings in risk sentiment, with risk assets recovering initially, to again come under pressure later on and bouncing higher again early on Tuesday.
On Thursday of last week, the European Central Bank shifted from a tightening bias to forecast lower growth and said inflation risks are no longer tilted to the upside. The change in stance and a relatively dovish ECB weighed on the euro. News that ECB’s executive board member Juergen Stark resigned from the ECB on Friday ignited concerns over a major disagreement between policy makers on how to tacklem the debt crisis and put more pressure on the single currency.
The euro plummeted on Friday, and continued its slide on Monday as fears of further escalation in the eurozone debt crisis led to increased risk aversion, with US and Asian equity markets closing sharply lower. Concerns over the European debt crisis intensified as support for Greece appeared to be waning and the possibility that it may default on its debt was seen more likely. EUR/USD broke out from a wide trading range, following ECB President Jean Claude Trichet’s news conference on Thursday. The pair had been confined within the range of 1.4050 and 1.4550 for the past two months.
The euro sold off, breaching key technical levels. The single currency fell to a seven month low versus the dollar and a 10 year trough against the yen. Early on Monday, it was down around 1.50 per cent versus the yen and almost one per cent versus the greenback.
Other ‘riskier’ currencies were also under pressure on Monday, with the Aussie down more than 1.25 and almost two per cent against the dollar and yen respectively. The single currency bounced back later on Monday on reports that China was considering buying Italian debt, which triggered a short-covering rally. Risk appetite was also lifted, but strength for risky assets soon waned as concerns over the debt crisis weighed on confidence, only to find support once more early on Tuesday.
The report, by the Financial Times, which sparked the short-covering rally, said that Italy was in talks with a ‘China fund’ to buy a ‘significant’ amount of Italian debt. EUR/USD rallied to above 1.3700 after Italian officials confirmed these talks on Tuesday, but soon pared its gains after Italy sold less long-term bonds than they initially targeted, at a record price since the introduction of the euro. The Italian Treasury sold €6.485 billion in five-year bonds at a 5.6 per cent yield.
Following the debt-auction, we witnessed a see-saw move in EUR/USD to continue on the tone set in the week so far. The pair jumped higher after Chancellor Merkel quashed speculation of an imminent Greek default after the United States expressed concerns about the situation in Europe.
A report that German Chancellor Angela Merkel and French President Nicolas Sarkozy were to release a joint statement on Greece lifted risk sentiment and the EUR/USD went up to 1.3711. However, it dipped almost 90 pips after the office of the French President said that there was no Franco-German statement scheduled for Tuesday.
Despite the choppy trading experienced in the early part of the week, the sharp decline in EUR/USD from 1.4549 to 1.3499 suggests further dollar strengthening in the coming weeks. With Japan warning they will intervene to curb yen strength and fight off speculative currency moves, and the Swiss National Bank having placed a floor in EUR/CHF at 1.20, forex investors will turn to the greenback as the last ‘safe-haven’ among the major currencies.
Since the SNB set a 1.20 floor for the EUR/CHF on September 6, the Swissie has tracked the euro very closely and as a result USD/CHF is already recovering lost ground. This month, the franc is down almost 10 per cent versus the greenback by the time of writing, as the pair recovered from 0.7711 to 0.8928.
On a final note, the G7 meeting of finance ministers and central bankers held last Friday in Marseille failed to reach any agreement on coordinated action. However Japan warned that they will continue to monitor the currency situation very closely and will intervene against speculative moves.
Japan’s resilience not to let the yen appreciate further should have capped its strength for the time being, as forex traders are weary of an intervention and reluctant to push it higher. This should bode well for the USD/JPY, and in fact the pair has already taken a breather and traded higher to 77.86 last Friday.
Upcoming FX key events:
Today: EZ CPI, US CPI & UK Retail Sales.
Tomorrow: EZ Current Account & US Michigan Consumer Sentiment.
FX technical key points:
EUR/USD is bearish, target 1.3400, key reversal point 1.4300.
EUR/GBP is neutral.
USD/JPY is bearish, target 75.50, key reversal point 81.50.
GBP/USD is bearish, target 1.5450, key reversal point 1.6150.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.