The European Central Bank and its President Jean-Claude Trichet insist on not debating interest rates, which remained unchanged at one per cent as expected, but continue to defend their position on the alarming situation involving Greece. The ECB maintains the pressure on the Greek government stating that no criterion will be modified for a single state in difficulty, while rating agency Moody's even went as far to say that because of the state of public finances, the country is headed for a "slow death".
This statement calls into question the ability of Greece to maintain their "A" rating, essential to guarantee the development of bonds to the ECB. This concern has weighed heavily on the euro. Sterling is the main beneficiary of this decline of the single currency, since the pair EUR/GBP closed the week below the important support of 0.8850, and even traded below 0.8800 earlier in the week, levels that had not been seen since September 2009.
Regarding the euro against the US dollar, long-term support at 1.4294, which is the 200 day moving average, should be tested soon, and if broken clearly, should attract investors with a long term view to liquidate long positions built up in recent weeks.
As for the United States, the mixed figures reported in the previous week have only confirmed the fragility of the recovery. This week will be fuelled by the Producer Prices Index and housing numbers. These figures should not bring additional volatility ahead of the FOMC meeting, planned for January 27.
In the UK, markets will focus on the Bank of England's MPC January meeting minutes. We expect to see a unanimous 9‐0 vote for both the policy rate decision as well as the decision to hold the size of the asset purchase programme unchanged. More importantly, we look for hints that the MPC will cease asset purchases in February, though the window may be kept open to purchase private sector assets.
The expected weakness of the yen has been temporarily halted by the massive interest of sellers of the EUR/JPY pair. However, this does not call into question the commitment of Japanese leaders for a weaker Yen. The US dollar against the Japanese yen should continue to rise and test 98.00 soon.
Although supported against the euro (1.4750), due to its current weakness, the Swiss Franc was stable against a basket of major currencies. This can be explained by the discretion of the SNB at the beginning of the year, despite the recent resolutions of Hildebrand (SNB Chairman) to prevent the risk of deflation due to a strong franc. The approach of 1.46 should be watched carefully, as this level had triggered the massive intervention of March 2009.
Upcoming FX key events
The Bank of Canada announces interest rates. We are not expecting the BoC to make any change to its policy rate forecast; however, the market will pay close attention to any comments on the exchange rate especially given the recent strengthening of the CAD. There are a few important data points to look out for over the week as well. These include German ZEW, UK employment and US housing starts, German PMIs and UK retail sales.
FX technical key points
EUR/USD is bearish, target 1.3560, key reversal point 1.4800
USD/JPY is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.5050, key reversal point 1.7000
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650.
Mr Longchamp is head of trading at RTFX Ltd.
RTFX Ltd ("RTFX") is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.
This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.
They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employees.
www.rtfx.com