7th July 2011
Currency Overview
Focus on ECB policy decision and the Euro/USD

Today sees the release of the ECB policy decision and the usual press conference. The ECB is expected to hike interest rates by 25bp. to 1.50%. This is built into the expectations.

Thoughts from the trading floor

The ECB hiked interest rates in April to 1.25% from 1.00%. Since the start of the year ECB have ramped up their hawkish stance on policy by dropping the appropriate word to describe rates. In January, they introduced the statement that the see short-term upward pressure on overall inflation, and at the same time “very close monitoring is warranted.” In March, the ECB signalled a April rate hike by announcing that “strong vigilance” was warranted on upside inflation pressures. Last month, the ECB signalled that they viewed inflation risks with “strong vigilance”. The policy stance was described as “accommodative”. If the ECB hike rates as planned today, it should confirm that the ECB are in a rate hike cycle. This is almost a given for the markets. After this, the markets need to work out how aggressive the cycle will be. The market is currently pricing in one further rate hike this year after the expected hike today

Going back to the start of the year, the ECB announced that they would “monitor very closely” upside inflation risks in January and February before signalling “strong vigilance” in March whilst dropping the word “appropriate” to describe interest rates. The monitor very closely statements of the April and May were then followed by a “strong vigilance” comment last month. Extrapolating forward this would imply a rate hike this month followed by a monitor very closely statement. This is expected by the markets. We have a similar situation to one we had last month where peripheral debt issues was the main driver of the markets heading into the ECB meeting (Bunds rallied firmly the day before the ECB meeting) and the German bonds subsequently shrugged off the strong vigilance commentary.

Key words to look out for:
“Appropriate”- (very dovish) This would suggest that potentially the ECB have decided that the current short-cycle (given they hike rates today) has come to an end and are in a wait and see mode. The one further hike expected late this year should then be unwound.

Announcing “monitor very closely”, with rates remaining “accommodative”- is expected by the markets. This would be quite event risk neutral.

Strong vigilance would indicate a hiking of rates next month. Doing so may need the ECB to use the words “(very) accommodative” to describe interest rates. Should be very hawkish as it would suggest a more aggressive cycle of hikes than currently priced in.

Interest rate corridor width:
Currently stands at 150bp. (marginal rate minus deposit rate). The pre-crises width for this corridor was 200bp. whilst the ECB’s liquidity provisions are being implemented (MROs, etc) widening the corridor to 200bp. should have a limited impact (may initially be taken as a tightening of liquidity). If this is announced alongside the easing out of the liquidity facilities, this would be seen as a further hawkish development. However, would put ECB in difficult position as many peripheral banks need the liquidity facilities to remain solvent. We also need to look out for the tender process of the MROs and LTROs. Currently they are conducted at a fixed rate. If this changes to a variable rate process, it would be a hawkish development. The ECB has continued to conduct fixed rate tenders despite hiking rates already this year as the peripheral banks are reliant on this process for liquidity.

Today’s other focus for the markets may be on the ECB measures to support peripheral banks. There has been talk of a two tier system where banks in the bailed out nations receive further liquidity provisions than the others, currently the ECB using fixed rate MRO and LTRO tenders for this process. Also the ECB will be quizzed about the recent Portuguese debt downgrade to junk by Moody’s. If another ratings agency follows and cuts Portugal to junk, this means that the ECB cannot accept Portuguese debt as collateral unless they make special provisions as they did for Greece.

With regards to the non-standard measures, described as “enhanced credit support” and the Securities Markets Programme, the ECB stated that these are “temporary in nature”.

Bull View

The Euro was under-pressure yesterday on the back of the Eurozone peripheral debt issues, and thus a surprise hawkish surprise may be required by the ECB to reverse the declines. The market may need the ECB to signal a more aggressive tightening phase for monetary policy, either through ramping up inflation rhetoric or the big surprise of another vigilance statement.

Bear View

The bears will cite the continued weakness in Eurozone peripheral debt as a sign that the market is “overvalued” and look to shrug off the expected hike by the ECB today. They may look for some sort of dovish surprise to support their case that the ECB are at least more deeply concerned about the ongoing peripheral issues.

Futex View

We favour bears, unless there is a hawkish surprise form the ECB, we favour the cross to weaken following the ECB press conference.

30th June 2011
Currency overview
Focus on the Euro vs. the Swiss Franc (EUR/CHF)

The Euro vs. the Swiss Franc has staged a modest comeback over recent days and is trading just shy of the 1.2100 handle this morning. The catalyst for these moves has been the naive euphoria surrounding developments in Greece. Yesterday the Greek parliament voted to implement the next round of austerity measures.

Thoughts from the trading floor

The EUR/CHF is trading just above the 1.2050 handle, with the record low being marked around the 1.1800 handle. The recent failure from the 1.2320 level marks this as a good short term resistance. Also the 1.2400-27 level is the major resistance and short-term market pivot. If bulls are to avoid further liquidation they must look to take back this area of the market. Below here, it remains liable to big capitulations, as seen yesterday. Technically, the market looks set to continue to trade lower, with the break below 1.2400 marking the potential of this next leg lower to be aggressive and violent in its nature. Invariably this will mean that choppy price action will be seen until the market can make a clear run away from the 1.2400 handle. Immediate term resistance above the 1.2100 handle is 1.2142-50. Bears looking for the market to make successive lower highs on the weekly timeframe must look to defend this level. Thus a short position around here with a tight stop has a favourable risk/reward. If this level holds, look for the 1.1800 handle to give soon. A move through here would mean that the market has formed an outside bar on the weekly charts, which also coincides with an outside week on the German Bund. Thus a move through the 1.2150 handle and a break of this week’s lows in the bunds may signal an extended move higher for the EUR/CHF with a target of around the 1.2400 handle.

Yesterday saw the Greek parliament pass the new austerity package in order for Greece to clam its next round of aid tranche form the EU and IMF. There is talk that the EU are looking into further aid, with the most likely outcome to be fresh loans to Greece combined with some sort of decent Private sector involvement. There has been talk that the Eurozone countries will encourage the Greek debt holders to roll over maturing debt into longer term durations to help with Greece’s insolvency issues. Also Greece is being encouraged to speed up privatisation measures to raise capital.
Although, ultimately this measure will be just another case of “kicking the can down the road”, the short-term reaction for the markets is likely to be risk friendly. It seems at the moment that the EU is looking more towards the restructuring/re-profiling route and are trying to figure out a way to do so without leading to a technical default.

Bull View

The bulls will look for the market to stabilise around the current levels before the market can stage a comeback. A move back through the 1.2500 handle should stabilise the market.

Bear View

The bears will look to maintain pressure below the 1.2400 handle. The market has consistently made lower highs and lower lows on a weekly/monthly basis since 2010, and below 1.2403-89 the market remains liable to a fresh and violent leg lower over coming weeks.

Futex View

We favour the short, medium and long term bears. We feel that the Eurozone debt crises will approach the endgame scenario heading into the coming weeks.

23rd June 2011
Currency overview
Focus on the Euro vs. the Swiss Franc (EUR/CHF)

The Euro vs. the Swiss Franc has remained under pressure over recent days, unable to recover with the rally in risk assets seen over the same period. This is suggesting that a quick turn-around is not imminent.

Thoughts from the trading floor

The EUR/CHF is trading around the 1.2050 handle, with the record low being marked around the 1.1950 handle. The recent failure from the 1.2320 level marks this as a good short term resistance. Also the 1.2400-27 level is the major resistance and short-term market pivot. If bulls are to avoid further liquidation they must look to take back this area of the market. Below here, it remains liable to big capitulations, as seen yesterday. Technically, the market looks set to continue to trade lower, with the break below 1.2400 marking the potential of this next leg lower to be aggressive and violent in its nature. Invariably this will mean that choppy price action will be seen until the market can make a clear run away from the 1.2400 handle.

Tuesday saw the Greek PM receive a vote of confidence from the Greek parliament to continue his role. This makes it more likely that the proposed austerity measures needed for Greece to receive the whole of the next trance of aid due from the first bailout package. Currently the market expects this austerity package to also pass. However we have heard continued discontent from the Greek opposition which means that this is far from a foregone conclusion. Thus the risks remain tilted towards risk aversion, especially where the EUR/CHF is concerned. The markets have used this corss as a major protection tool and therefore it has tended to not match euphoric risk rallies in other asset classes.

Going forward, as far as the market is concerned, restructuring and re-profiling of debt will likely be a bad outcome with regards to risk appetite. Re-profiling is likely to lead to a credit default type event. However, encouragingly for the bulls, Greece may get more money in exchange for national asset sales or at least Greece having to use these assets for collateral on the loan extensions. Although, ultimately this measure will be just another case of “kicking the can down the road”, the short-term reaction for the markets is likely to be risk friendly. It seems at the moment that the EU is looking more towards the restructuring/re-profiling route and are trying to figure out a way to do so without leading to a technical default.

Bull View

The bulls will look for the market to stabilise around the current levels before the market can stage a comeback. A move back through the 1.2500 handle should stabilise the market.

Bear View

The bears will look to maintain pressure below the 1.2400 handle. The market has consistently made lower highs and lower lows on a weekly/monthly basis since 2010, and below 1.2403-89 the market remains liable to a fresh and violent leg lower over coming weeks.

Futex View

We favour the short, medium and long term bears. We feel that the Eurozone debt crises will approach the endgame scenario heading into the coming weeks.

9th June 2011
Currency overview
Focus on the Euro (EUR/USD)

The Euro has settled above the 1.4600 handle over recent days, trading to around the 1.4700 handle in Tuesday before easing back a little. Today we expect the ECB to hold rates at 1.25%

Thoughts from the trading floor

The ECB hiked interest rates in April to 1.25% from 1.00%. Since the start of the year ECB have ramped up their hawkish stance on policy by dropping the appropriate word to describe rates. In January, they introduced the statement that the see short-term upward pressure on overall inflation, and at the same time “very close monitoring is warranted.” In March, the ECB signalled an April rate hike by announcing that “strong vigilance” was warranted on upside inflation pressures. Last month, the ECB signalled that they will “monitor very closely” the upside risk to price developments. The policy stance was described as “accommodative”.

Going back to the start of the year, the ECB announced that they would “monitor very closely” in January and February before signalling “strong vigilance” in March. The monitor very closely statements of the last 2 months imply that if this pattern is to hold, then we would expect a “strong vigilance” comment. Looking at the recent movements in the short-end of the curve, neither the risk of a strong vigilance or monitor very closely comments have been fully priced in. Therefore, we should expect a good move in either direction today.

Key words to look out for:

“Appropriate”- This would suggest that potentially the ECB have had a one off hike and are on a wait and see stance again. The ECB may then put the monitor closely line back in as per their stance in January. This would be a dovish development.

Announcing “monitor very closely”, with rates remaining “accommodative”- same as last month- should see brief relief rally in bonds, and small unwinding of longs in the Euro, i.e. Not as hawkish as feared.

Strong vigilance would indicate a hiking of rates next month. Doing so may need the ECB to use the words “(very) accommodative” to describe interest rates. This should be very hawkish.

Interest rate corridor width:

Currently stands at 150bp. (marginal rate minus deposit rate). The pre-crises width for this corridor was 200bp. Whilst the ECB’s liquidity provisions are being implemented (MROs, etc.) widening the corridor to 200bp. should have a limited impact (may initially be taken as a tightening of liquidity). If this is announced alongside the easing out of the liquidity facilities, this would be seen as a further hawkish development. However, would put ECB in difficult position as many peripheral banks need the liquidity facilities to remain solvent.

Today’s side focus for the markets may be on the ECB measures to support peripheral banks. There has been talk of a two tier system where banks in the bailed out nations receive further liquidity provisions than the others.

With regards to the non-standard measures, described as “enhanced credit support” and the Securities Markets Programme, the ECB stated that these are “temporary in nature”.

Bull View

The bulls will look for the ECB to signal a July hike today. The continued immediate term strength may depend on the ECB announcing further tightening going forward.

Bear View

The bears look for the ECB to signal that rates will be on hold for another month. With the April hike as a one-off and return to a wait and see stance. With the Euro pricing in a potential series of hikes going forward, it will be left vulnerable especially considering the fresh developments in the Eurozone debt crises overnight..

Futex View

We favour the bears. The market has impressively shrugged off the Eurozone issues. However the continued hope of higher interest rates has kept the Euro well bid against the USD, which should be stronger considering how weak risk markets are at the moment.

26th May 2011
Currency overview
Focus on the Euro vs. the Swiss Franc (EUR/CHF)

The Euro vs. the Swiss Franc has steadily deteriorated over the last week, and has made fresh all time lows over the last 4 days. The market has yet to gain firm momentum since the break of the 1.2400 handle, however the fundamentals continue to support further weakness.

Thoughts from the trading floor

The EUR/CHF is trading below the 1.2400 handle, which has been a good short-term pivot for the market over recent months, which is below the all time low last printed in December 2010. The market had formed firm support between 1.2403 and1.2427, and the break below here confirms that the medium-long term downtrend of the currency pair has recommenced after t 5 month period of sideways consolidation. This new leg lower should be quite a violent leg lower and thus we would expect some choppy trade between the recent low around 1.2300 and near term resistance at 1.2400-89. If bulls are to make a comeback, it is upmost importance that this area is breached very soon to avoid the next deep leg of the sell-off from taking place.

We have seen over the last week a further deterioration in the European debt crises. 10yr Greek bond yields briefly pushed towards the 20% mark, and there is a growing consensus that some form of restructuring will have to take place. Credit ratings agencies have made it clear that re-profiling of the debt will be considered a credit event and the scale of the losses that may take place could dwarf the losses seen on the Lehmann Brothers bankruptcy. This is mainly down to the fact that most banks hadn’t hedged their exposure to Eurozone sovereign debt as it was considered “risk free”. Also, the potential contagion effect into the other sovereigns which are under pressure could see losses cascade. The big money...smart money... is expressing this view by buying Swiss Francs and selling Euros. They want to keep their money in Europe but not in the Euro.

Bull View

The bulls will look for the market to stabilise around the current levels before the market can stage a comeback. A move back through the 1.2500 handle should stabilise the market.

Bear View

The bears will look to maintain pressure below the 1.2400 handle. The market has consistently made lower highs and lower lows on a weekly/monthly basis since 2010, and below 1.2403-89 the market remains liable to a fresh and violent leg lower over coming weeks.

Futex View

We favour the short, medium and long term bears. We feel that the Eurozone debt crises will approach the endgame scenario heading into the coming weeks.

12th May 2011
Currency overview
Focus on the Euro vs. the Swiss Franc (EUR/CHF)

The Euro vs. the Swiss Franc has steadily deteriorated over the last 2 weeks. Having failed recently at repeated attempts to bounce from April’s steady sell-off, the market has started to accelerate its sell-off. The market is currently trading around the 1.2600 handle.

Thoughts from the trading floor

The EUR/CHF is trading below the 1.2700 handle, which has been a good short-term pivot for the market over recent months. The failure to take out the 1.3200 handle after forming the double bottom around 1.2400 now sees the market rapidly approaching this area again. Thus this may now signal that the 1.2403-27 area will eventually be breached. Bulls will need to retake the level represented by the 50% retracement from the 1.2427 lows to the 1.3245 highs, which is be around the 1.2836 level. Ominously for bulls, the market has also failed at the 200-day MA, which had gradually moved down to around the 1.3050 handle. Over the last 2 years it has successfully capped gains at major swing highs. Thus the medium to long term downtrend remains intact.

We have seen over the last week a further deterioration in the European debt crises. Talk of a Greek restructuring event in the near future, although denied has hurt market sentiment. It is likely that Greece will have an extension to its loans and/or be allowed to pay back the loans from the EU and IMF at lower borrowing costs. However the market has wiser to the fact that these repeated bailouts are failing and peripheral debt market confidence is falling at an alarming level. This is represented by the sharp sell-off seen in the Euro vs. both the Swiss Franc and the USD. Interestingly, the EUR/CHF has been the lead in determining overall risk appetite. Whilst the USD was weakening forcing the EUR/USD higher, this market was still edging lower. Now with investors looking to move back into USD, the sell-off in the EUR/CHF may accelerate further. Big money... informed money, is moving into Swiss Francs and out of the Euro. We now expect the market to make new all-time lows in the coming weeks.

Bull View

The bulls will look for the market to stabilise around the current levels before the market can stage a comeback. A move back through the 1.2850 handle should stabilise the market. However, ultimately they will need to retake the 200-day MA at 1.3060 to look to turn the market in the medium/long term.

Bear View

The bears will look to take out the 1.2400 handle. The market has consistently made lower highs and lower lows on a weekly/monthly basis since 2010, and they will see this latest selling over recent days as a fresh deterioration and eventually target a break of the 1.2400 all time lows to signal the resumption of the long term bear trend.

Futex View

We favour the medium and long term bears. We feel that the Eurozone debt crises will approach the endgame scenario heading into the coming weeks.

5th May 2011
Currency overview
Focus on the Euro (EUR/USD)

The Euro has rallied sharply over the last week, and is now trading around the 1.4900 handle. The market traded firmly over the last month, yesterday making fresh 2011 highs as the markets anticipate the ECB policy announcement today. Today we expect the ECB to maintain rates at 1.25%.

Thoughts from the trading floor

The ECB hiked interest rates last month to 1.25% from 1.00%. Over the last 3 months the ECB had ramped up their hawkish stance on policy by dropping the appropriate word to describe rates. In January, they introduced the statement that the see short-term upward pressure on overall inflation, and at the same time “very close monitoring is warranted.” In March, the ECB signalled a April rate hike by announcing that “strong vigilance” was warranted on upside inflation pressures. Last month, the ECB returned to signalling that they will “monitor very closely” the upside risk to price developments. The policy stance was described as “accommodative”.

Going back to the start of the year, the ECB announced that they would “monitor very closely” in January and February before signalling “strong vigilance” in March. If this pattern is to hold, then we would expect another “monitor very closely” statement. The surprise would be of a “strong vigilance” comment, although looking at the recent movements in the short-end of the curve, the risk of a strong vigilance comment may have started to get priced in (30% according to some sources). Therefore, a monitor very closely comment may result in a short-lived relief rally in the short-end of the curve. A strong vigilance comment should still be very bearish for the short-end.

Key words to look out for:

“Appropriate”- This would suggest that potentially the ECB have had a one off hike and are on a wait and see stance again. The ECB may then put the monitor closely line back in as per their stance in January. This would be a dovish development.

Announcing “monitor very closely”, with rates remaining “accommodative”- same as last month- should see brief relief rally in bonds, and small unwinding of longs in the Euro, i.e. Not as hawkish as feared.

Strong vigilance would indicate a hiking of rates next month. Doing so may need the ECB to use the words “(very) accommodative” to describe interest rates. Should be very hawkish.

Interest rate corridor width:

Currently stands at 150bp. (marginal rate minus deposit rate). The pre-crises width for this corridor was 200bp. Whilst the ECB’s liquidity provisions are being implemented (MROs, etc) widening the corridor to 200bp. should have a limited impact (may initially be taken as a tightening of liquidity). If this is announced alongside the easing out of the liquidity facilities, this would be seen as a further hawkish development. However, would put ECB in difficult position as many peripheral banks need the liquidity facilities to remain solvent.

Today’s side focus for the markets may be on the ECB measures to support peripheral banks. There has been talk of a two tier system where banks in the bailed out nations receive further liquidity provisions than the others.
With regards to the non-standard measures, described as “enhanced credit support” and the Securities Markets Programme, the ECB stated that these are “temporary in nature”.

Bull View

The bulls will look for the ECB to signal further policy tightening in the near months. The use of “strong vigilance” should signal a June hike and therefore be the upside surprise bulls are looking for.

Bear View

The bears look for the ECB to hold off form signalling aggressive monetary policy tightening.

Futex View

We favour the bulls. The market has impressively shrugged off the Eurozone issues. A slightly less hawkish than expected press conference may cause a short-term sharp pull-back however we expect the market to base and then rise again going into next week.

7th April 2011
Currency overview
Focus on the Euro (EUR/USD)

The Euro has rallied sharply over the last week, and is now trading around the 1.4300 handle. The market traded firmly above here yesterday making fresh 2011 highs as the markets anticipate the ECB policy announcement today. Today we expect the ECB to hike rates by 25bp to 1.25%.

Thoughts from the trading floor

Rates were described as “appropriate” at the January and February meetings. Last month the ECB ramped up their hawkish stance on policy by dropping the appropriate word. In January, they introduced the statement that the see short-term upward pressure on overall inflation, and at the same time “very close monitoring is warranted.” Last month, the ECB signalled a potential rate hike this month by announcing that “strong vigilance” was warranted on upside inflation pressures. Thus markets have priced in a 25bp. hike. Going back to the previous rate hike in July 2008, the ECB used the term “heightened alertness” as opposed to strong vigilance before hiking rates in July. Going back to the start if the previous rate-hike cycle in 2005, the ECB had used the term “vigilance” for most of the year before announcing strong vigilance in November followed by a subsequent hike in December.

Key words to look out for:
1. “Appropriate”- This would suggest that potentially the ECB have had a one off hike and are on a wait and see stance again. The ECB may then put the monitor closely line back in as per their stance in January. This would be a dovish development.
2. Omitting “appropriate” and announcing monitor very closely, vigilance or strong vigilance would indicate the start of a rate hike cycle. Doing so may need the ECB to use the words “ (very) accommodative” to describe interest rates. This would pave the way for a further clarification to how the ECB see the current policy. This would be very hawkish.
3. The use of heightened alertness as opposed to vigilance. Although this terminology seems to have been scrapped.

Today’s side focus for the markets may be on the ECB measures to support peripheral banks. We have heard over recent days that Portuguese banks have been struggling to raise money form wholesale markets, and the precarious sovereign position has left the Portuguese asking for a bailout from the EU last night.

With regards to the non-standard measures, described as “enhanced credit support” and the Securities Markets Programme, the ECB stated that these are “temporary in nature”.

Bull View

The bulls will look for the ECB to hike rates today, as expected. Although the continued immediate term strength may depend on the ECB announcing further tightening going forward.

Bear View

The bears look for the ECB to hike rates but signal the hike as a one-off and return to a wait and see stance. With the Euro pricing in a potential series of hikes going forward, it will be left vulnerable especially considering the fresh developments in the Eurozone debt crises overnight..

Futex View

We favour the bulls. The market has impressively shrugged off the Eurozone issues. A slightly less hawkish than expected press conference may cause a short-term sharp pull-back however we expect the market to base and then rise again going into next week.

31st March 2011
Currency overview
Focus on the Euro vs. the Swiss Franc (EUR/CHF)

The Euro vs. the Swiss Franc has continued its recovery over the last week.. The market hit highs around the 1.3050 handle yesterday and has since held around these higher levels. The strength of the market has broadly coincided with both strength in the Euro currency as a whole and broad based Swiss Franc weakness.

Thoughts from the trading floor

The EUR/CHF is trading around the 1.3000 handle. Over the two weeks, the market has sold down to the 1.2400 handle and recovered since. The move higher since then marks the 1.2400-1.2427 level as a key bottom. If the 1.3043 level is taken, bulls will aim for a move through the 1.3207 level. The medium to long term outlook will rest on the market’s reaction around this level. If this is breached, an extended recovery to the 1.3836-1.3926 area will be on the cards. Bears will need to defend the 1.3043-1.3207 area. Another failure to recover through here would mean that the market remains short term range-bound with a medium term bearish bias. Thus may signal that the 1.2403-27 area will eventually be breached.

We have seen over the last week a further deterioration in the European debt crises. This week we have seen further downgrades of Portuguese and Greek sovereign debt, and the Portuguese 10yr debt is trading above the 8% yield mark. This has seen Portuguese debt against German Bunds trading at Euro lifetime highs. So far the market has been able to ignore these developments, which is a sign of strong positive momentum. Today sees the Irish Bank Stress Test results. It is known that these Irish banks have a capital short-fall of around EUR 25Bln, which will need to be met by the Government which will effectively have to nationalise the entire bankrupt banking sector. This should lead to further pessimism over the Irish Sovereign debt as it is likely, in our view, the failures of the banking sector will lead to the government needing to ask for debt forgiveness (haircuts on govt. debt) in the coming months. The ECB will need to step in at some point with a short-term funding mechanism, known as the Exceptional Liquidity Assistance (ELA) which will provide the banks with EUR 60Bln in liquidity assistance. This is effectively prolonging the eventual inevitability of a debt restructuring event.

Bull View

The bulls will look for the market to stabilise around the current levels before the market can stage a comeback. A move back through the 1.3043 level should target the 1.3200 handle.

Bear View

The bears will look to take out the 1.2700 handle. The market has consistently made lower highs and lower lows on a weekly/monthly basis since 2010, and they will see this latest selling over recent days as a fresh deterioration and eventually target a break of the 1.2400 all time lows.

Futex View

We favour the medium and long term bears. We feel that the Eurozone debt crises will approach and endgame scenario heading into this year and will look to sell into these short-term rebounds, trading with the trend of the last 12 months.

25^th March 2011

Currency overview

Focus on the Euro vs. the Swiss Franc (EUR/CHF)

The Euro vs. the Swiss Franc has recovered impressively off its lower levels hit last week. The market hit lows at 1.2427, just shy of the record low at 1.2403. The market is now trading sharply higher at 1.2950 this morning, and thus that recent low may be a seminal moment for the market.

Thoughts from the trading floor

The EUR/CHF is trading around the 1.2950 handle. Over the two weeks, the market has sold down to the 1.2700 handle on the back of fears of a Japanese nuclear meltdown. However, the recovery since then may now mark the 1.2700-1.2427 level as a key bottom. If the 1.3043 level is taken, bulls will aim for a move through the 1.3207 level. The medium to long term outlook will rest on the market’s reaction around this level. If this is breached, an extended recovery to the 1.3836-1.3926 area will be on the cards. However, the foolish SNB interventions above the 1.4000 handle will cap gains in the long term. Bears will need to defend the 1.3043-1.3207 area. Another failure to recover through here would mean that the market remains short term range-bound with a medium term bearish bias. This may signal that the 1.2403-27 area will eventually be breached.

We have seen over the last 2 days a further deterioration in the European debt crisis. On Wednesday, the Portuguese parliament rejected the latest austerity packages causing Prime Minister Socrates to resign from his post. The subsequent swift action taken by the ratings agencies to further downgrade Portugal’s sovereign debt has put further pressure on its government debt. The 10yr Portuguese debt is trading around the 8.0% mark. Around these levels, Greece and Ireland had already been bailed out and thus a Portuguese bailout request may be on the cards within the next week or two. The EFSF has the power to purchase Portuguese debt in order to finance the country. However, at these yield levels it is likely that the Portuguese will need to ask for this support. Despite these recent issues, the EUR/CHF has remained firm, and thus it seems as though the market has discounted this possibility. If the contagion were to spread to Spain, then we may see the European markets start to react negatively once again.

Bull View

The bulls will look for the market to stabilise around the current levels before the market can stage a comeback. A move back through the 1.3043 level should target the 1.3200 handle.

Bear View

The bears will look to take out the 1.2700 handle. The market has consistently made lower highs and lower lows on a weekly/monthly basis since 2010, and they will see this latest selling over recent days as a fresh deterioration and eventually target a break of the 1.2400 all time lows.

Futex View

We favour the medium and long term bears. We feel that the Eurozone debt crisis will approach an endgame scenario heading through this year and will look to sell into these short-term rebounds, trading with the trend of the last 12 months.