The US dollar continues to slip lower when seen against its major counterparts; at the time of writing the buck is down 0.50 per cent for the month and 2.90 per cent since the beginning of the year. The US dollar is only gaining when seen against the Japanese yen.
The rise in the price of oil continued to feed into concerns over the global recovery- Rudolf Muscat
Across the major currencies we note the key levels reached against the USD: the EUR/USD is close to three month highs, the GBP/USD is close to one month highs and the AUD/USD is holding close to a four month high since early February. Yet the USD strengthened when seen against the yen, the USD/JPY is at nine month highs.
The traditional safe haven (USD) finds itself pressured despite that risk appetite remains rather hesitant and USD selling remains in check. On the other hand, however, better data from the United States combined with the BoJ’s recent easing stance has helped the USD lift itself against the yen. The more optimistic data from the United States makes the probability of further QE from the United States less likely and thus helps the USD when it comes to interest rate differentials (seen against the JPY).
At week start the euro had some issues to nurse but remained in support. Weighing on the single currency was S&P’s decision to lower Greece’s credit ratings to selective default from CC previously; S&P added that the rating may be returned to CCC after the debt swap is concluded. On the whole the downgrade was somewhat expected and the ECB has already accepted Greek sovereign debt as eligible collateral; the real issue is if a CDS event will be triggered, and this is a decision the International Swaps and Derivatives Association (ISDA) was expected to make by yesterday.
In a nutshell CDS stands for Credit Default Swaps which is like insurance, where the seller of the bonds binds himself to make a payoff in the event of default while the buyer from his end must make a series of CDS payments.
The EUR/USD traded in the range of 1.3366 – 1.3476 for the former part of the week, which levels represent three month highs. For the current week to the upside resistance is seen in the region of 1.3574 – 1.3682 while support lies between 1.3075 – 1.3270.
A number of bond auctions from Italy in the former part of this week saw borrowing costs fall significantly ahead of the LTRO tender due yesterday. The week’s highlight was probably the ECB’s long term refinancing operation (LTRO) where the European Central Bank was expected to allot loans in the region of € 500 billion. The tender would continue to help the European bank’s liquidity and ring fence these institutions against the losses incurred on Greek debt.
In the light of a number of global central banks shifting towards further easing – amongst which the BoE’s recent shift to an increase in its asset purchases target, the BoJ’s move towards inflation targeting and also the FED keeping the option of QE3 alive (despite not committing to it) – the opportunity cost of gold is bound to stay lower.
The opportunity cost of gold is the interest foregone by not holding other interest bearing investments; since gold in itself does not payout any coupon. Now as these major central banks tend towards easing the outlook for interest rates remains low – this should help support the yellow metal.
This support we have in fact seen reflected in the price trading for the metal; since mid last week the yellow metal has maintained itself at three month highs close to $1787.42, touched last week. A look at the daily charts shows that the price for the metal has managed to break out of the series of lower highs it had experienced after reaching all time highs last September. Gold broke out of the bearish trend line at the end of January and has remained biased higher since then. The metal might possibly be resuming the longer term bullishness.
In the meantime the rise in the price of oil continued to feed into concerns over the global recovery as the commodity marked 10-month highs. Despite we would have usually been accustomed to see the CAD reflecting more strongly the rise in the price of oil, it being an oil exporting country, we note that the correlation of the USD/CAD to the price of oil somewhat diminished from levels of around -0.94 in April 2011 to the current -0.72.
Upcoming FX key events:
Today: Swiss GDP, EZ PMI Manufacturing, EZ HICP Flash, US PCE & US ISM PMI.
Tomorrow: EZ PPI & US GDP Annualised.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 7800.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is a senior trader at RTFX Ltd.