At the start of a very busy week on the economic agenda, forex markets kicked off on a spicy note. Early on Monday, the Japanese Finance Ministry authorised an intervention by the Bank of Japan in the FX markets. This was the third time this year Japan intervened in the forex market to curb the strength of a surging yen.
The yen had just extended its post war highs versus the US dollar and prompted Finance Minister Jun Azumi to initiate another bout of FX intervention. USD/JPY inched lower at the start of the week, to 75.57, but surged higher, more than four per cent, to 79.53 on Japan’s actions.
The dollar was well bid at the start of the week, as Japanese authorities bought mainly the greenback to curb the strength of their currency. Markets traded in a generally risk-off tone despite a slightly higher than expected headline inflation estimate. Flash year-to-year consumer price index rose three per cent in the eurozone in October, versus consensus for 2.9 per cent. However, the eurozone unemployment rate jumped higher than expected to 10.2 per cent versus 10.0 per cent, keeping risk sentiment grounded.
By Tuesday, risk aversion had again taken control, as a shock announcement from Greece revived fears on whether policymakers will be able to solve the debt crisis. Prime Minister George Papandreou said he will call a referendum on Greece’s latest bailout, astonishing other eurozone members and unleashing Germany’s fury. A senior German parliamentarian even suggested casting Athens out of the euro currency bloc, cutting off its aid lifeline and allowing it to default.
If the Greek people were to reject the latest bailout deal in a referendum, it would cast serious doubts on whether Greece will receive its next aid tranche, and move it closer to a catastrophic default. This would increase the risk of further contagion and global financial markets instability.
Undoubtedly this latest development weighed on the single currency and riskier assets across the board, including commodities and equities. Forex investors cut exposure to the single currency and other higher-yielding assets, fleeing to “safe-haven” currencies such as the dollar and the yen.
The euro had dipped more than one per cent by the time of writing versus the dollar and the yen. EUR/USD plummeted almost five big figures from the close of last week. In fact, so far this week it dropped from a high of 1.4170 to 1.3672, breaking through key technical levels such as the 100 and 200-day moving averages.
The greenback and the yen were supported on Tuesday. The buck extended its gains from Monday, while the yen trimmed some of its losses following the BOJ intervention. USD/JPY steadied, as forex traders stayed on the sidelines awaiting hints from the Bank of Japan’s next moves. However, investors were wary about pushing the greenback too aggressively beyond this point, ahead of a two-day Federal Open Market Committee meeting which was scheduled to end yesterday, as any hints by the Federal Reserve of further easing could weigh on the greenback.
Meanwhile, on Tuesday, the Reserve Bank of Australia cut its key interest rates by 25 basis points to 4.50 per cent as expected. The RBA cited weaker Chinese growth, lower commodity prices and a high Australian dollar among others as the reasons behind the decision to ease. The decision by the RBA further contributed to dampening risk appetite and drove the Aussie even lower. The Aussie fell across the board, more than two per cent against the dollar and the yen. AUD/USD fell to 1.0294 by the time of writing, breaking below its 100 and 200-day moving averages at 1.0436 and 1.0408 respectively.
Sterling was also bullish at the start of the week, tracking the dollar higher versus the euro. It trimmed some of its recent gains versus the dollar weighed by Japan’s intervention and the risk-off tone in the markets. Despite its recent losses against the greenback, cable posted its best monthly performance since April 2011, closing almost three per cent higher. However, the pound was up almost two per cent against the single currency on the week by the time of writing.
EUR/GBP dropped to 0.8565, within sight of its eight-month lows. GBP/USD fell to 1.5913 from a multi-week high hit on Monday at 1.6165.
Upcoming FX key events:
Today: ECB Interest Rate decision and news conference and US Non-Manufacturing PMI.
Tomorrow: US Non-farm Payrolls, Private Payrolls and Unemployment Rate, and EZ PPI.
FX technical key points:
EUR/USD is bearish, target 1.2850, key reversal point 1.4100.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5125, key reversal point 1.6250.
USD/CHF is neutral.
AUD/USD is bearish, target 0.0.9500, key reversal point 1.0800.
NZD/USD is bearish, target 0.7100, key reversal point 0.8200.
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Mr Xuereb is a trader at RTFX Ltd.