In the former part of the week the euro remained on the defensive, staying buoyed by the Greek deal over the weekend and gaining mostly against the weaker US dollar and the Japanese yen, as risk appetite remained in favour. The Greek Parliament approved a package of austerity measures, early Monday morning, but in itself it is not sufficient if not aligned with the private sector involvement PSI negotiations – for which we still so far await a conclusion.
Europe may emerge to lead the global economy- Rudolf Muscat
After hitting two-month highs Thursday of last week (at 1.3321), the EUR/USD currency only managed highs of 1.3284 last Monday and to the downside the currency pair remained capped at 1.3127. The EUR/JPY continued to push the price higher as the euro gathered support vis-à-vis the Japanese yen. The currency pair hit 11-year lows mid-January when it touched lows of 97.03.
Early into the Monday session, data showed that Japanese real GDP shrank 2.3 per cent in Q4 which was much worse than expectations at 1.3 per cent, primarily caused by easing exports as the yen remains strong. The following day on the conclusion of the BoJ’s policy meeting the Japanese Central Bank left the policy rate unchanged but set an inflation target of one per cent year-on-year and increased its asset purchases target to be able to meet this target.
The USD/JPY rose to day’s high at 78.19 last Tuesday, after opening the session at 77.57. So far this week the currency pair has traded in the range of 77.36 – 78.19, to the upside resistance is expected between 78.12 - 78.62, while to the downside 76.00 – 76.81 should provide support.
Overall while the euro keeps capturing markets’ focus, it has also alienated investors away from the negative factors surrounding the US dollar. With the upcoming elections in the US (November 2012) the focus is likely to shift away from budget deficits, and more likely to go on job creation.
For those investors wanting to diversify from the euro, the short list of alternatives one may consider for shelter, the traditional “safe havens”, becomes more and more complicated and less populated. For example the Swiss franc is pegged to the euro, the US dollar and the Japanese yen have their own debt problems and gold prices still seem to tend towards high.
Investors should have probably now started to focus on broadening their exposures on currencies such as CAD, AUD and NZD with healthier debt-to-GDP ratios or with relatively more compact fiscal houses like the GBP. While in the short run the prospects for the euro remain clouded by the possibility of rate cuts from the ECB, the outcome of April/May elections in France (whether a new leadership will effect negatively the Franco German relations) and last but certainly not least anything that comes out of Greece.
There are other positive factors that have so far kept the euro less weak such as the Long Term Refinancing Operation, better known as LTROs, that has seriously helped to avert an inter bank credit crunch. In the long run, given the eurozone gets through the current crisis, Europe may emerge to “lead the global economy on a host of performance based criteria” – and here I am quoting the 2011 Euro Plus Monitor produced by Berenberg Bank and the Lisbon Council.
The study goes on to say that “the eurozone as a whole is turning into a much more balanced and potentially more dynamic economy” and is currently making fiscal and structural reforms that other heavily indebted countries such as the US and Japan are not currently doing.
In the United Kingdom inflation data for the month of January showed a sharp decline in inflation, in line with the BoE’s expectations for a fall in annualised inflation rates this year. Nonetheless the GBP/USD fell to week’s low last Tuesday after Moody’s downgraded the outlook from stable to negative for six eurozone countries, including Britain.
GBP/USD has traded in the range of 1.5686 – 1.5827 so far this week. For the current week the currency pair is expected to find resistance in the region of 1.5866 - 1.5997 while to the downside support should hold the price at 1.5600 - 1.5668.
Upcoming FX key events:
Today: EZ ECB Publishes Monthly Bulletin, US PPI & US Housing Starts.
Tomorrow: UK Retail sales, Canadian CPI & US CPI.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3450.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bullish, target 1.0050, key reversal point 0.8550.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is a senior trader at RTFX Ltd.