11th December Currency Overview
11th December 2009
Currency Overview
Focus on Spot EUR/USD (Euro)
After making a “double top” at 1.5142 last week, the Euro has trended lower. This has been in-line with broad USD strength as risk appetite in markets has turned lower on the back of the uncertain outlook of world economies after key ratings downgrades of Dubai and Greece.
Thoughts from the trading floor
The Euro has now broken down below the 1.4800-1.4827 support area. The market formed a “double top” at 1.5142 last week before breaking sharply lower after the US Non-Farm Payrolls report. On the daily chart, the market seems to be consolidating its losses below the 1.4800 handle, and has made a “bear flag” (the flag trend is at 1.4700 today). The flag targets around the 1.4500 handle on the break. Although the market would have to take out the important 1.4626 swing low first. This could prove to be pivotal for the market, as a subsequent break below 1.4450 could signal the start of a medium term correction to the 1.4000 handle. Otherwise, a recovery through 1.4800-27 may see a return to range trade between here and the 1.5000 handle.
The Euro has been hit with a ‘double whammy’ bearish signal since Friday’s NFP report. The report, which was much stronger than expected was initially seen as bullish for the USD, as participants brought forward expectations of policy tightening by the Fed. This also caused a sharp unwinding of carry trades and a turn lower in risk appetite. Since then, we have seen ratings actions against Greece and Spain rock European markets in particular, which has further depressed the Euro. Should we continue to see negative sentiment in risk trades continue into year end and the start of next year, we may see the Euro continue to trend lower. Although, significantly, Fed Governor Bernanke made a speech this week, that was dovish in its nature, which may result in participants unwinding rate expectations seen after the NFP number, especially if we see a pickup in risk appetite if participants choose to ignore the bad news regarding sovereign downgrades.
Bull View
The bulls will hope that the USD strength seen after the NFP number last week is unwound as one number cannot signify a trend. This is especially in light of comments made by Bernanke. Thus, a pickup in risk appetite may force further unwinding of recent safe haven bids in the USD forcing the Euro to recover through the 1.4800 handle.
Bear View
The bears will see the current climate of uncertainty as an opportunity to make up for lost ground. The issue of sovereign downgrades has the potential to develop into a full blown crisis, and in that respect should hurt risk appetite across the board. As the USD remains the World’s reserve currency, it should remain a safe-haven as it makes a downgrade of the US unlikely in the short-term. They will cite that a downgrade of the US, should it occur, will be well telegraphed to the markets ahead of time and allow for repositioning very early.
Futex View
We favour the bears. We feel that the uncertainty surrounding government fiscal situations and the prospects of downgrades hurting risk appetite to be too great to ignore. Even if the markets recover somewhat going into Christmas, the start of next year may be the time for the bad news to come out of the wood work.
