Forex Blog

May 9, 2012

Euro Price Action Increasingly Bearish But Yet to Close Below Key Barrier

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 7:16 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • Greece political uncertainty fuels fears of contagion
  • Euro under pressure but yet to close below 1.3000
  • Commodity bloc and emerging market FX most exposed

The ongoing political turmoil in Europe continues to shake the markets, with the inability for Greece to form a government now fueling speculation that the country might soon exit the Eurozone. Although an exit by Greece would have only a minimal impact on the broader economy, given the country’s size, fears of contagion seem to be the bigger problem right now, as investors start to price in the impact this will have on larger economies like Spain and Italy.

Technically, we have said that a close below 1.3000 would be a very bearish development for the Euro, as we have not seen a daily close below 1.3000 since January. With this in mind, Euro bulls can still hold onto some hope at this point, as the market has yet to officially put in a daily close below 1.3000. As such, we continue to recommend proceeding with caution at current levels, and only recommend looking to get more aggressively bearish the Euro on a daily close below 1.3000. A daily close below 1.3000 should then open the door for acceleration back towards the 2012 lows from January at 1.2625.

Despite the fact that all of the problems right now are Euro-centric, the Euro is still not the weakest currency in the current market environment, as the higher yielding risk correlated markets get hit even harder. We have been seeing some underperformance namely on the commodity bloc and emerging market FX, and should investors continue to look to flee to safety, we project that these markets will continue to underperform. As such, look for more weakness from currencies like Aussie, Kiwi and Cad, and from the more exotic markets like the Mexican Peso, South African Rand and Turkish Lira.

Greek Exit Fears Are Growing

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 6:04 am

The weekend’s inconclusive elections in Greece were seen by many as an indication of a rising risk that Greece may exit the euro zone.

The New Democracy won the elections with 19 percent of the vote, gaining 108 seats; Syriza was second with 17 percent, winning 52 seats; and Pasok came third with 13 percent, or 41 seats.
The elections results have raised European concerns over Greece’s ability to hold to the terms of its two bailouts negotiated since May 2010, when the European authorities demanded Greece’s government to implement 11.5 billion euros budget cuts.

Alexis Tsipras of Greece’s Syriza announced that he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to inform the EU leaders about revoking their written pledges to implement austerity measures by the time he meets them today to discuss a government alliance. Tsipras handed in this ultimatum to renounce support for the EU’s rescue terms as a condition for the political leaders to enter government. Tsipras told reporters that “there will be no 11 billion euros of additional austerity measures; 150,000 jobs will not be cut.” Samaras and Venizelos rejected his request.

Some analysts said, it is possible that Greek political turmoil could result in a new government that actively renounces the bailout—leaving Greece without its rescue aid. If official funding from the International Monetary Fund (IMF) and the rest of Europe were cut off, the Greek government would have no new sources for cash. It could try to stretch out payments to suppliers and government workers and live off its remaining funds for some time. If there would be no spending cuts, the only alternative left to the government would be to print the country’s own currency to pay for government services.

An exit from the currency would throw into doubt contracts denominated in euros, with consequences for the real economy, not just the financial sector. In absence of assurance that a euro payment will actually be made in euros, companies might be less willing to conduct business or trade with vulnerable member states. Investors would start looking at other countries in an environment, where there is already a weakness of natural demand for Spanish and Italian government bonds, particularly among foreign investors.

The bailout has left the governments of Europe, the European Central Bank and the IMF as Greece’s main creditors. While the international creditors urged Greek leaders to hold to the agreed terms of their EU-IMF bailouts, letting Greece exit euro zone would mean significant losses for them. The two-year-old bailout program and the massive debt restructuring earlier this year have helped insulate Europe’s banking system and private sector from Greek troubles.

In the weekend, Tsipras’s party, Syriza, won just 52 of the 300 seats in parliament, and many economists said that the chances it could have to form a governing coalition appeared slim. If Greece is unable to form a government, it faces another election in June and will be on a collision course with its creditors.

Sources: Wall Street Journal and Bloomberg

May 8, 2012

Eurozone Political Drama and Softer Global Data to Weigh on Sentiment

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 7:16 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • Risk rallies viewed as technical corrections; look to sell
  • Euro consolidating above 1.3000 ahead of next drop
  • Investors digesting implications of latest French and Greek elections
  • Spain back in focus as the country attempts to rescue local bank

Although we have seen a bit of a bounce in risk correlated assets, we contend that the rally is nothing more than some minor consolidation ahead of the next wave of risk liquidation. The Euro managed to close back above 1.3000 on Monday, but from here, we expect any additional rallies to be very well capped ahead of 1.3200 in favor of an eventual retest of the 2012 lows from January at 1.2620. Market participants are still digesting the weekend election results out of France and Greece, and there is a good deal of concern as to whether the newly elected governments will adhere to the austerity measures imposed to ease the debt crisis. In Greece, the situation is highly uncertain, with the lack of a clear majority potentially creating a situation where austerity measures might be significantly reduced in order to appease the opposition. Elsewhere, Spain is back in the headlines, as the country attempts to rescue its third largest bank. Moving on, economic data continues to show signs of weakness, and the softer results once again highlight the fragile state of affairs in which the global economy lies. Overall, we expect risk correlated currencies and global equities to be very well offered on any rallies in favor of more bearish price action.

May 7, 2012

European Election Results Leave Merkel Vulnerable

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 8:39 am

In rejecting their incumbent governments, voters in Greece and France have sent markets reeling. In France, Nicolas Sarkozy’s government fell to Francois Hollande to form France’s first socialist government in more than 20 years. Elections in Greece also led to the rejection of the current government and negotiations are underway to create a new coalition government.

German Chancellor Angela Merkel also suffered a setback managing only a single-point victory in a series of regional elections. These results can only be seen as a growing rejection of the austerity measures across the Eurozone calling into question the deals established over the past year to slash deficits in exchange for emergency funding. Hollande in particular has vowed to abandon Sarkozy’s planned spending cuts promising instead to increase taxes on businesses and the rich while simultaneously boosting social spending.

Given Merkel’s insistence on spending controls, there can be no doubt that the region’s two largest economies are headed in opposite directions. This will also mark a major change in euro leadership. Sarkozy and Merkel have, for the most part, presented a united front during the crisis and have been responsible for providing a sense of stability even during the most challenging times. With Hollande now calling the shots in France, markets now have far more questions than answers.

Greece to be First Test

With a decidedly different mood now taking over in Europe, the first big test will be Greece. The new coalition is expected to be headed by the New Democracy party which led all other parties winning 108 of the 300 parliamentary seats. While the new coalition’s makeup is still a question, it is clear that the fiscal policies of the current administration are about to be reversed.

During the campaign, the New Democracy party pledged to cancel spending cuts and abandon new taxes recently implemented. Keep in mind, these measures were required as part of the deal to access emergency funding and future payments are tied to meeting certain objectives.

If the new government does indeed mean the end of austerity efforts in Greece, it is a certainty that Merkel, fearing a backlash from German voters, will insist on holding Greece accountable. However, with Sarkozy now out of the picture, and voters making their voices heard across the region, Merkel could find her influence to be severally curtailed.

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European Politics to Influence Trade Over Coming Days; Long EUR/GBP

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 7:12 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • French and Greek election results to influence trade over coming days
  • Opposition to austerity measures to be a major theme going forward
  • Global equities continue to slide as risk liquidation dominates
  • Euro attempting to establish below key support at 1.3000
  • New Trade: Long EUR/GBP by 0.8050 (see “Trade of the Day” below)

The weekend results from the French and Greek elections have shaken things up in the Eurozone, top open a fresh wave of broad based risk liquidation. Global equities have come under some intense pressure, and the US Dollar has been mostly bid on the flight to safety trade. Any hopes for austerity in France and Greece have been significantly diminished, with the newer governments now likely to decline a ratification of the EU treaty unless new growth promoting measures are included. The Euro has subsequently broken down through some major support by the 1.3000 barriers and could be at risk for deeper setbacks over the coming days towards the 2012 lows by 1.2620. For now however, shorter-term technical studies are looking a little stretched and our recommendation would be to look to sell into Euro strength rather than into additional weakness. For today, we focus on a different market in EUR/GBP, which we contend could be getting a little ahead of itself following some already steep setbacks in recent weeks.

TRADE OF THE DAY

The EUR/GBP cross rate has now accelerated to fresh yearly and multi-month lows, leaving daily studies well oversold and in serious need of a major corrective bounce. In the previous week, we had warned of the potential for another drop down towards the 2010 base by 0.8060, but also said that we would be looking to buy on a dip once this level was broken. The latest downside break on Monday has finally broken below 0.8060, and we will look to take advantage of the pullback. There is also now a good deal of previous resistance turned support at current levels, with some consolidation and congestion from back in 2008 likely to prop for the time being. The daily RSI tracks down by 20 and is dramatically oversold, and we like the idea of the fresh long in favor of a significant bounce over the coming sessions. Throw in the UK market closure on Monday, and it seems like this market may have been sold a little too aggressively. POSITION: LONG AT 0.8050 FOR AN OPEN OBJECTIVE; STOP ONLY ON A DAILY CLOSE BELOW 0.7950.

May 6, 2012

Greek main parties ‘suffer big losses’

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 1:19 pm

Early results in Greece’s parliamentary election suggest the two main parties have suffered dramatic losses.

With 11% of the vote counted, centre-right New Democracy is in the lead with 22%, down from 33.5% in 2009.

Centre-left Pasok is in second place with 16%, down from 43.9% in the last elections. Syriza, a left-wing coalition, is in third place with 15%.

Pasok and New Democracy, in coalition since last November, were expected to lose support to anti-austerity parties.

There is widespread anger across Greece to harsh measures imposed by the government in return for international bailouts.

Earlier, exit polls put Syriza – which opposes the government’s austerity measures – in second place, narrowly ahead of Pasok.

BBC

May 4, 2012

EUR Bears Lighten Ahead of NFP

Filed under: OANDA News — Tags: , , , , , , , , — admin @ 4:25 am

NFP is the granddaddy of all economic releases and the layup to this morning announcement has consisted of a month of “forgettable” trading. One of theses day’s a payroll release will manage to break the camels back, however, today is not considered to be one of them (famous last words). Before yesterday’ weekly claims, a spat of three consecutive releases had the market inching towards the undesirable upper echelons just below the psychological +400k print and an investor beginning to worry that tad bit more.Yesterday’s claims print (+365k vs. +392k) managed to break that undesirable trend and at the same time seems to be appeasing some of that lost faith that occurred after the dismal private ADP report the day before (+119k vs. +178k).

The swing of this morning’s US release predictions vary from a small negative to a healthy creation of +200k new jobs with an unemployment rate continuing to hover around +8.2%. However, the consensus seems to be settling for a number just north of +100k, confirming that the recovery of the US labor market remains sluggish. Today’s release is not expected to break short-term market perception of a softer result rekindling the QE3 debate. Either way, investors expect the ‘single’ currency to extend its biggest weekly decline in a month amid concern leadership changes at elections in France and Greece this weekend could derail the region’s austerity efforts.

The accompanying Open Position ratio chart continues to tell a compelling story. Just over +57% are happy remaining short EUR’s which is off from this week’s high print of +63%. A portion of the market seems content paring their short position at current levels as liquidity risk lies ahead next Monday, a day after the weekend elections. Remember, London will be on holiday, creating a liquidity vacuum. Their non-market participation will only exacerbate some of the early moves in the exchange rate, at least until North America joins the fray!

May 4th Positions

Weighing into the EUR negative sentiment this morning is the Spanish and Italian services sector contracting further last month and causing “anxiety about the state of the Euro-zones economy.” This morning’s final PMI reading confirms that the Spanish services sector has managed to contract for the tenth-straight month. This decline comes hot on the heels on data earlier this week confirming that the country has technically reentered a recession in Q1. The Italians are no better, their services PMI index fell to its lowest level in three-years. Both of these economies are suffering from a ‘marked cyclical slowdown’ and it is only natural to believe that tighter fiscal conditions add further pressure on domestic demand. This will eventually translate into further deterioration in Q2.

The EUR bears are backing a Holland win in the French second round this Sunday, resulting in investor concerns about the ability of Euro-zone officials implementing the agreed upon fiscal measures having an impact on a timely basis. The EUR bears should be looking towards the upcoming Irish Euro referendum. Current Irish government intimidating tactics to squeeze out a yes vote is making the referendum personal, not something that the pro-Europeans would be hoping for.

Liquidity will not last long today either. Many will want to shut up shop early, unless of course the market can come up with a complete ‘outlier’ NFP result.

Forex heatmap

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ECB holds EZ interest rate

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May 2, 2012

Euro Zone Unemployment at Its Highest Since 1997

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 5:22 am

Euro zone unemployment rose to the highest in almost 15 years and manufacturing contracted for a ninth month.

According to the European Union’s statistics office, the unemployment rate in the 17-nation area sharing the euro increased to 10.9 percent in March from 10.8 percent in February. This is the highest level since 1997. The number of people out of work in the region reached a record high of 17.4 million in March.

Markit Economics reported that the manufacturing gauge in the region fell to 45.9 in April from 47.7 in March, indicating further that the euro zone economy continues to weaken.

A recent survey of economists showed that the European Central Bank is likely to keep its benchmark interest rate at 1 percent, in order to stimulate growth in the region.

In the 27-nation European Union, the unemployment rate was 10.2 percent in March, unchanged from the previous month and up from 9.4 percent in March last year.

Spain had the region’s highest unemployment rate in March, at 24.4 percent, Greece came in second with 21.7 percent. The lowest jobless rates were in Austria and the Netherlands, at 4 percent and 5 percent, respectively.

Source: Bloomberg

April 30, 2012

EUR Squeeze Persists

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 4:39 am

EUR bears give it up! Bulls, is it worth it? All this for a few ticks in either direction from the close each day or are you both promising that this week will be different? It is another week full of PMI’s, however, moderation is expected to be the overwhelming theme both in the US and Europe this week. Today’s Chicago and Dallas releases are unlikely to be supportive for further recovery in risk sentiment. That’s not saying to expect any weak reports this week, but, moderate estimates and releases will do little to reinvigorate growth-sensitive currencies and risk. The riskier of the releases will come from the Euro peripheries. They do not provide flash, for them, it’s straight down to business.

After taking time out to acknowledge May Day, some of the market’s focus will naturally shift towards the ECB meeting later in the week. The event itself is not expected to bring forth any new major initiatives this week. However, both investors and analysts will be pouring over all copy and rhetoric looking for evidence of softening rhetoric that aligns itself with some of the recent weaker data of late. The ECB must at least comply with the recent divergence alongs G7 yield thinking, otherwise, it’s back to the drawing board for most of the trade strategy initiatives.

Both Greece and France go to the polls next weekend. The event risk probably sits with the Greeks. A Hollande victory in France, despite irking the ‘Euro’ Chancellor Merkel already, could be seen as a victory for more a pro-growth policy stance in France and it’s this way of thinking that benefits market sentiment. It’s not a surprise that the bigger event risk is probably Greece. The failure of the center parties to achieve an outright majority in combination can only lead to a coalition amongst the ‘less’ desirables. This will not be a EUR market friendly agreement. However, a round of new elections could be an alternative outcome.

Amongst all this political euro jockeying, Spain and France again has to come to ‘market.’ Last week was painful enough for the FX trader. The impatient bunch ended up yield watching during periphery refinancing week, and lived through every basis point! Spain will go to market with 3‘s and 5‘s on Thursday, and France will sell 5’s, 10‘s and 15-years. With most of the Spanish refunding requirements completed for this year, the focus will shift to the other peripheries to lead the yield way. It is they that will keep the Spanish benchmark knocking on the +6% door.

NFP ending the week is the unknown component for risk in the new month. So far, the release estimate has been gyrating between a small negative print and a bang on release close to expectations (+175k). As the release approaches on Friday, many more opinions will be made know. With Treasury’s, equities and gold ending last week higher and the dollar stumbling, are we setting the scene for QE3? It’s worth reminding ourselves that a disappointing weekly claim print last week (third consecutive one) has inspired some renewed QE3 enthusiastic rhetoric. An uninspiring NFP release will be the key to shaping the quantitative outlook. Imagine what the asset class landscape is going to look like if there is no QE3 announcement at the June FOMC meet!

For now, the market is back to it regular EUR figure expiry and cross-selling routine. What else can anyone expect when you straddle key number points like 50 and the figure. The tighter stop losses on either side of market continues to be taken out as no fundamental strategy remains in play just yet. Overall and for now, the market continues to wait for momentum to build in either direction.

Forex heatmap

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NFP to Shape the QE Outlook

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March 23, 2012

EC Encouraged To Increase Rescue Funds

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The European Commission (EC) has recommended to increase the size of the euro zone’s rescue funds from 500 to 940 billion euros.

The recommendation by the EC also includes two other scenarios; raise funds only temporarily to either 940 billion euros or 700 billion euros before reducing again to 500 billion euros.

For a permanent increase, resources from other G20 countries would most likely be required. Therefore, the EU leaders would need to focus more on efforts to persuade non-euro zone countries to increase commitments to the International Monetary Fund.

The EC’s preference would be to take the unused guarantees in the existing bailout fund (EFSF) and move them into the new European Stability Mechanism (ESM). This would raise the ceiling initially to 940 billion euros. However, when the 200 billion euros committed to Greece, Ireland and Portugal would be used by the end of bailout programmes, the long-term size of the ESM would drop to 740 billion euros.

The next option would be to run the two funds side by side until the existing fund, the European Financial Stability Facility (EFSF), expires in the middle of 2013. This plan would temporarily increase the overall financial firewall to 940 billion euros but only for a year.

The third option would be to discontinue the EFSF but allow the three bailouts to continue outside the ESM, giving the ESM its full 500 billion euros capacity. Under current laws, the bailouts will be rolled into the ESM, lowering its lending capacity to about 300 billion euros over time.

Germany has so far resisted increasing the rescue system arguing that the recent state of financial markets indicates that raising the firewall’s ceiling is no longer needed.

The question of increasing the size of the euro zone’s firewall will be discussed at the EU’s finance ministers meeting in Copenhagen next week. The deadline for agreeing on this deal is at the end of this month.

Source: FT

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