Risk aversion eases, riskier bets benefit

Risk aversion took some respite in the former part of the week; the riskier bets saw the comeback of some support flowing back into their favour. Over the weekend the feeling was that action from the eurozone was brewing – various media reports from different eurozone countries suggested some euro-positive action could be coming up.

There is a debate over the ECB’s possible role in bond mark intervention- Rudolf Muscat

In the former part of this week overall the euro was down an average 0.70 per cent against the majors, it gained 0.65 per cent and 0.72 per cent respectively against the dollar and the Japanese yen. It lost mostly to the commodity bloc currencies namely CAD, AUD and the NZD as these recovered significant grounds on the back of improved risk sentiment.

The currencies perceived as safer or more liquid, like the dollar and yen shed an average of 1.44 per cent and 1.46 per cent respectively when seen against the major currencies.

Rumours that the IMF was preparing a €600 billion loan for Italy, just in case it needed to resort to it, ushered the week’s start and helped lift sentiment. Even though the rumour was later dismissed as not reliable positive sentiment continued to rally.

Late last week S&P credit rating agency downgraded Belgium’s long term rating down to AA with a negative outlook. Despite the negativity that it might have been expected to continue portraying the outcome was on the whole rather positive in the sense that it pushed the Belgian Parliament to agree on the 2012 Budget. The country has been unable to find common ground to form a government for 19 months following its elections.

This week there was quite a number of eurozone countries who needed to tap at liquidity markets including Belgium, Italy, France, Spain, Austria and Germany. Up to the time of writing the Italian and Belgian ones managed to somehow avert the most negative outcome (given the situation) and although the yields shot dangerously higher, especially for Italy – at least it managed to satisfy its need for liquidity.

On Tuesday the focus remained on the eurozone, a euro group meeting captured the limelight. Eurozone finance ministers had to give their go ahead on the details for the leveraging of the EFSF, the bailout fund. The finance ministers were expected to also conclude the release of the next tranches for Greece and Ireland.

The EFSF was expected to be leveraged from its current €440 billion facility to a higher upper limit but that was also dependent on the amount of public and private interest generated after the details were finalised. The expected EFSF’s enhanced duties could include intervention in the primary and secondary bond markets, and extending precautionary credit lines to governments.

There has recently been a growing debate over the ECB’s possible role in bond market intervention and also as a lender of last resort for governments. The ECB announced that it had settled €8.58 billion worth of purchases through the Securities Market Programme, a higher figure when compared to the previous weeks, but it is believed the central bank could have intervened more strongly especially given the rising pressure on sovereign yields. The ECB has till now insisted, that a larger role is not part of its mandate and even Germany has opposed the larger role for the ECB.

The EUR/USD remains bearish in line with our previously expected projections until the end of the year; the currency pair reached lows of 1.3212 late last week. We note that these lows now expose new possible downside targets namely; 1.3150 and 1.2900. To the upside price swings should remain capped by 1.4300 region.

Last Tuesday, in the UK, the Office for Budget Responsibility delivered its economic and fiscal forecasts. While the Chancellor of the Exchequer cut the growth forecasts for the UK economy significantly, and highlighted the risks posed by euro zone problems he also said that the budget goals remain on track but expected to continue beyond 2015.

The British pound remained overall in the negative despite it took the lead against the USD, EUR, CHF and the JPY. Losses against the stronger AUD, NZD and CAD however dragged it lower. In the earlier part of this week the GBP/USD pushed to 1-week highs of 1.5656, while against the euro the GBP went as low as 0.8533.

Upcoming FX key events:
Today: French Unemployment Rate, Swiss Q3 GDP, EZ PMI Manufacturing, US ISM Manufacturing.
Tomorrow: Canadian Employment Change, US Non Farm Payrolls and Unemployment Rate.

FX technical key points:
EUR/USD is bearish, target 1.3150, key reversal point 1.41.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5125, key reversal point 1.6170.
USD/CHF is neutral.
AUD/USD is bearish, target 0.9600, key reversal point 1.0745.
NZD/USD is bearish, target 0.7300, key reversal point 0.8239.

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Mr Muscat is a senior trader at RTFX Ltd.