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Plans to boost EFSF lift risk appetite

The euro started the week sharply lower, wiping out all of last Friday’s slight recovery, and dropping to an eight-month low versus the dollar early on Monday. The single currency appeared to be extending its decline, continuing where it had left off Thursday of last week, on increasing risk aversion in global financial markets.

Risk appetite was weighed by the announcement of “Operation Twist” by the Federal Reserve last week following their Federal Open Market Committee (FOMC) meeting. Investors were clearly positioned for a more aggressive move by the US central bank and sold-off on riskier assets after the announcement.

The Fed announced an intention to purchase $400 billion of long-term debt, which is to be funded by selling the same amount of short-term paper, by the end of June 2012. Sentiment was dampened further by the fact that the FOMC vote was not unanimous, highlighting division within the Fed. The language used in the statement also left the door open to further policy action, which left a lot of uncertainty among traders.

The dollar found support as forex investors sought it’s “safety” given heightened risk aversion in global markets. The situation in Greece seemed to worsen at the end of last week, with speculation about a possible default increasing. Global equity markets were under pressure, weighed by concern over the banking sector’s exposure to Greece’s debt.

Over the weekend, IMF/World Bank meetings in Washington offered little clarity on measures to tackle lingering debt woes. Investors perceived a lack of initiative to finding a lasting solution to the eurozone debt crisis. The IMF communiqué pointed out that the global economy has entered “a dangerous phase, calling for exceptional vigilance” but did not offer any guidelines to tackle the problems.

EUR/USD plummeted lower early on Monday, extending its decline to 1.3363, an eight-month low. The pair ran into support by 1.3361 represented by the 76.4 per cent Fibonacci retracement of the move from 1.2874 to 1.4940, 2011’s low to high. A break below this level should expose the pair to further declines and test this year’s low.

The single currency managed to garner some reprieve by the US session on Monday, amid reports of a plan being devised to boost the firepower of the European Financial Stability Fund. The euro continued its rebound on Tuesday extending its gains versus the dollar despite comments by Spain’s economy minister who dismissed rumours of an extension of the EFSF to €2 trillion, saying it was not on the table.

Risk appetite improved on Monday and Tuesday, leading global equity markets higher and pushing demand for risk assets. Renewed optimism came about on hopes of a rescue package for the eurozone debt crisis which mainly involves leveraging up the EFSF.

The Japanese yen experienced a similar fate to the US dollar over the past few days. It was also supported at the back end of last week as forex investors sought “safety” and extended its gains earlier in the week, only to pare some of its gains later on Monday and Tuesday. EUR/JPY appeared to be in free fall at the start of the week, plunging to a decade low of 101.94, but bounced back up to 104.32 at the time of writing.

The yen continued to be supported against the greenback as it is still the preferred “safe-haven” currency especially since the SNB set a floor on the EUR/CHF at 1.2000, which effectively ended, for the time being, safe-haven flows towards the Swissie. USD/JPY continued to hover close to its all-time low at 75.95 hit in August of this year. However forex investors are wary about pushing the yen higher on concerns that Japan may intervene again in FX markets to stem its strength.

The yen is up almost six per cent versus the greenback so far this year, 4.50 per cent versus the euro and more than eight percent against the Aussie.

The pound also recovered some of its losses so far this week after slipping to a one-year low against the greenback last week. Sterling remains bearish however, as speculation of further quantitative easing by the Bank of England is weighing on the British currency. GBP/USD rose to 1.5675 on Tuesday, from its lows last week at 1.5328 after minutes from the latest BoE policy meeting showed that monetary policy officials are ready to ease policy further.

Metals have come under severe pressure at the start of the week, with spot gold (XAU/USD) falling more than $120 an ounce in a few hours as investors sought out the liquidity of the dollar. Gold fell to $1,533.40, its lowest since mid-July. XAU/USD is down more than 9.50 per cent so far this month. Silver (XAG/USD) also tumbled lower, down more than 21 per cent this month, weighed by a more expensive dollar. Furthermore, RTFX Trend recorded a 16.69 per cent gain by Monday’s closing on XAG/USD. The trend turned bearish from September 22 at a start rate of $35.87 and closed at $30.74 on Monday.

Upcoming FX key events:
Today: US GDP Annualised, US PCE & EZ Sentiment.
Tomorrow: EZ Flash HICP, US Core PCE & US Michigan Sentiment

FX technical key points:
EUR/USD is bearish, target 1.3250, 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 1.5200, key reversal point 1.6000.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

Please feel free to send any comments or feedback regarding our articles on [email protected].

RTFX Ltd (“RTFX”) is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

www.rtfx.com

Mr Xuereb is a trader at RTFX Ltd.

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