Last Sunday, eurozone finance ministers approved a €85 billion financial rescue package. The news was initially euro positive, but investors’ mood soon soured and the pair drifted to lows of 1.3064 during Monday trading. Ireland will use €10 billion for immediate recapitalisation of its banks, €25 billion will remain available for any contingency, and the remaining €50 billion will help to fund the state.
It seems that the Irish bailout has so far failed to cool concerns that there may be further contagion and Spain does not seem to be far off the list of possible candidates for contagion. Earlier this week, the Irish yield spread continued to widen when compared to the German bunds – the same also applied to the yield spreads of Portugal and Spain. Furthermore, Italy and Belgium are now affected as well.
Rising eurozone bond spreads are a visual display of investor concerns over eurozone debt – and the fact that spreads keep rising only means more downside for the euro is to be expected. Various theories indicate that in the short to medium term the recent break of the 1.33 and the 1.30 levels potentially exposes a drift down to 1.24, unless support around the 1.30 or 1.27 areas manages to hold and reverse the trend. At the time of writing the EUR/USD has already made lows of 1.2969.
The eurozone is being pressured to broaden its rescue efforts from this current piece-meal approach – rescuing nation after nation – to a more generic approach. In fact, apart from the endorsement of the Irish package, the finance ministers also approved the outlines of a permanent crisis-resolution system – where it seems that the private investors might be carrying some of the burden of a possible sovereign debt restructuring process. This would only be applied for those bonds bought after 2013.
RTFX Trader Tip sees support at 1.3037/1.2826 (to the downside) and resistance at 1.3623/1.3998 (to the upside) for the week.
Markets seem unaffected by comments that investors might be looking in the wrong direction when they are fuelling European debt concerns and that the United States’ debt could be cause for more concern. Reports in the Washington Post went as far as saying that the next debt run may be in the US – quoting political unwillingness to take control of longer term deficits; and the financial burden of the retiring baby boomers, Social Security and Health spending and also due to the cost of defense. Market analysts don’t see USD strength lasting in the longer-term.
This see-saw of concerns from the US to Europe and vice-versa probably exists because investors seem to like to focus on one thing at a time, and once a particular issue is resolved or at least seen as less of a threat – another issue, which had previously been ignored, gains the limelight.
Data from Japan, issued last Tuesday, showed that unemployment rose to 5.1 per cent from the previous five per cent. On Monday the USD/JPY was trading at two-month highs, reaching levels of 84.41 as much of the concerns clouding the eurozone favoured the USD.
In the UK, the office for Budget Responsibility (OBR) revised GDP growth for 2010 to 1.8 per cent (up from 1.2 per cent) but lowered GDP growth for 2011 to 2.1 per cent (from 2.3 per cent). EUR/GBP trading dipped towards lows of 0.8365, earlier this week, after it had opened the week at 0.8513.
The weakened euro was supportive of the GBP in its trades against the single currency. But the weakened euro was more supportive for the US dollar, and this led the USD to gain against the GBP. GBP/USD dipped towards lows of 1.5510 after making highs of 1.5647 in the former part of this week.
The AUD enjoyed some support against the US dollar over data for building approvals for the month of October showed a 9.3 per cent increase vs an expected of 1.4 per cent, and a previous -5.3 per cent. This data bodes well for the Australian domestic housing market.
However with the prevailing uncertainty clouding the markets, the Aussie was generally losing against the US dollar. Increasing risk aversion decreases support for the higher yielding currencies like the AUD. Against the USD the Aussie traded lows 0.9566 after highs of 0.9699 – AUD/USD had gone beyond parity, reaching highs of 1.0182 on the 5th of November.
Upcoming FX Key events:
Today: EZ ECB Interest Rate Decision, EZ GDP Preliminary & US Pending Home Sales.
Tomorrow: US, Non-farm Payrolls, US Unemployment Rate, EZ PMI Services & Canadian Change in Unemployment.
FX Technical Key points:
EUR/USD is bearish, target 1.2400, key reversal point 1.3700.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5300, key reversal point 1.6300.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.