Riskier assets started the week under pressure extending declines from last Friday. Fuelling risk aversion was an announcement late on Friday, by rating agency Fitch, that it was putting several eurozone countries on negative outlook and also put the outlook on France to negative. Countries affected were Belgium, Italy, Spain, Slovenia, Cyprus and Ireland.
The death of Kim Jong-il also weighed on risk sentiment- Emman Xuereb
Fitch also said that a comprehensive solution to the periphery debt crisis was now “beyond reach”. Moody’s also downgraded Belgium from Aa1 to Aa3 pushing the rating lower by two notches. The latest actions by rating agencies piled more pressure on the euro nations and came on the back of Standard & Poor’s downgrade of almost the entire currency bloc.
Despite inching away from an 11 month low earlier on Friday, the euro and risk appetite in general ended the week on a sour note. The single currency was initially buoyed by a short-covering rally after a Spanish bond auction on Thursday was well received by investors and better than expected jobless claims data from the US. But further woes from rating agencies dragged sentiment lower towards the end of session on Friday, and continued over the Asian session on Monday.
News of the death of North Korean leader Kim Jong-il over the weekend also weighed on risk sentiment, on Asian equity markets in particular. The declaration by both South Korea and Japan that they were on alert amid concerns over a smooth leadership transition took its toll on equity markets in the region and favoured yet another “flight to safety”, lending support to the US dollar.
Hopes that the European Central Bank will eventually step up purchases of European bonds were helping to calm markets towards the end of last week. However, in an interview in the Financial Times over the weekend, and in a testimony before the European Parliament, ECB President Mario Draghi reiterated his opposition to ramping up bond purchases. He said that bond purchases were “not infinite”. This news also weighed on the single currency as optimism that the Central Bank will opt for more quantitative easing to cool off the debt crisis were helping to calm yields, lending support to the single currency.
Draghi did however affirm his belief in the common currency, and dismissed any doubts over its strength. In the interview, he also touched the subject of eurozone exit, saying that countries exiting would be faced with massive inflationary pressures, while austerity measures would need to be implemented anyway.
On Tuesday of this week, risk appetite gained some respite and the euro crept away from its recent lows. Sentiment was lifted by stronger than expected German IFO and a steep fall in borrowing costs at a Spanish bond auction. Higher-yielding currencies rose, while the greenback slipped across the board. The Spanish Tesoro sold €5.64 billion in three and six-month bills, versus a target of €4.5 billion target, while the average yields for the three-month and six-month papers fell to 1.735 per cent and 2.435 per cent respectively from 5.110 and 5.227 per cent in their previous auctions last month.
German business sentiment rose more than expected in December, the IFO survey showed on Tuesday. The latest figures published by the Munich-based IFO defied expectations for a decline, evidencing the fact that Europe’s largest economy remains strong despite a battered euro zone economy.
Stronger consumer confidence data from Britain, and minutes from the Reserve Bank of Australia early on Tuesday also helped improve risk appetite. The minutes showed the Australian Central Bank expressed a less dovish view than expected, presenting a well balanced outlook, despite being somewhat anxious over the evolution of the euro zone debt crisis.
EUR/USD crept higher on Tuesday to 1.3132, more than one per cent higher. The pair was expected to gather some short-term support on short-covering rallies, while thin-holiday volumes may exaggerate price swings. AUD/USD rallied almost two per cent on Tuesday, peaking at 1.0095 by the time of writing. Japan announced plans to boost their FX intervention firepower to 195 trillion yen, up from 165 trillion. Finance Minister Jan Azumi also said that his country intends to diversify some of its FX reserves by purchasing Chinese bonds. USD/JPY remained fairly muted after the announcement, but dipped slightly by around 0.40 per cent to 77.75.
Upcoming FX key events:
Today: US and UK GDP; US Michigan Consumer Confidence and Chicago National Activity Index.
Tomorrow: US PCE Index; US Durable Goods Orders and Canadian GDP.
FX technical key points:
EUR/USD is bearish, target 1.2870, key reversal point 1.3550.
EUR/GBP is bearish, target 82.80, key reversal point 86.60.
USD/JPY is neutral.
GBP/USD is neutral.
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 Xuereb is a trader at RTFX Ltd.