Appetite for risk boosts euro, global shares
A batch of strong data and earning reports from the United States at the start of the week pushed risk appetite higher, while investors hoped a meeting of leaders from European nations later in the week would yield more comforting news on Spain and Greece.
Sentiment was buoyed by a rally on Monday in US shares which were lifted by better-than-expected earnings report by Citigroup, the third largest American bank, and by advance retail sales data which beat expectations. On Monday, US stocks trimmed some of last week’s losses when they posted their deepest weekly drop in four months on uncertainty over Greece and Spain, and weaker corporate results. Europ-ean and Asian shares extended the push by risky assets on Tuesday on hopes that Spain may soon ask for a financial bailout and Greece may eventually come to an agreement with its lenders.
The euro rose to 1.3060 against the US dollar on Tuesday as forex investors were in risk mode, but traders warned that it may struggle to make a sustained rally above 1.3000 while uncertainty over a Spanish aid request lingers. Uncertainty over when Spain will formally make the request has hindered the single currency’s rise in the last few weeks. EUR/USD has been confined in the range between 1.2804 and 1.3072 since mid-September, as Spain tantalises on whether it will be seeking financial assistance. The pair hit a four-month peak on September 17 by 1.3172, but forex investors have been reluctant to push it higher while debt concerns over Spain and Greece remain.
A European Union leader’s summit today and tomorrow is expected to shed more light on the timing of Spain’s request for a bailout. Few are expecting the request to come at the summit but more likely to come in the coming weeks. An aid request is crucial as it would prompt the European Central Bank to initiate its OMT bond-buying programme and bring down its borrowing costs, while also easing pressures of contagion to other highly-indebted nations like Italy. Investors are also looking at whether Greece will be given the support it needs to allow it to stay in the eurozone.
Economic data out of Europe on Tuesday also lifted risk appetite and pushed the euro and other riskier currencies higher. Eurostat said annual inflation in the euro area eased in September, which should allow the ECB more breathing space when taking monetary policy decisions. In the UK, inflation neared a three-year low in September, the Office for National Statistics said, giving the Bank of England more flexibility to add to its asset purchases programme. Also on Tuesday, Spain sold €4.86 billion in 12- and 18-month Treasury bills at a slightly lower cost than the previous sales for the same maturities.
EUR/USD edged closer to its three-week high of 1.3072 by the time of writing on Tuesday, hitting a session high of 1.3060. The single currency pushed higher after the ZEW institute showed a better-than-expected improvement in German investor confidence, adding signs that Europe’s largest economy is battling hard to stave off the zone’s debt troubles. The pair peaked to its session high after data from the US showed annual inflation rose at a faster pace than expected. Despite this, economists do not see inflation threatening the economy because the Fed is likely to let prices rise faster than its two per cent target in the short term to allow for faster economic growth.
The common currency also rose to four-week highs versus the yen and sterling on Tuesday. EUR/JPY touched 103.08 and broke higher than a key resist-ance level by 102.80 to pave the way for further gains to test a five-month high by 103.85.
EUR/GBP rallied to 0.8102, coming within sight of a four-and-a-half-month high by 0.8115. Media reports that Germany was open to a precautionary line of credit for Spain accelerated gains for the single currency, as it shows Germany may not want Spain to wait to ask for help.
USD/JPY rose to 78.95 on Tuesday, its highest since September 19, as speculation that the Bank of Japan will add more stimulus weighed on the Nipponese currency.
Upcoming FX key events
Today: EU Leaders summit, UK Retail sales and US Philly Fed index.
Tomorrow: EU Leaders summit, Canadian CPI and US Existing home sales.
Technical key points
EUR/USD is bullish, target 1.3350, key reversal point 1.2550.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bullish, target 1.6400, key reversal point 1.5750.
USD/CHF is bullish, target 1.00, key reversal point 0.91.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.