Another week, another four big figures lower for EUR/USD. The rally after the Irish bailout lasted less than a day because nothing has been agreed yet and negotiations are dragging on. Eurozone peripheral concerns still dominate the news and North Korea is adding to the risk-negative sentiment.
There are a lot of denials over the wires – Portugal is not being pressured to apply for a bailout of its own, an increase to the €440 billion EFSF is not being discussed and Mrs Merkel doesn’t envisage sovereign debt restructuring. Apparently. What is not being denied is that there is some disagreement between the ECB and the IMF as to whether or not the Irish should attempt to renege on its guarantee of senior bank debt – or ‘burden-sharing’ as they are calling it.
This morning Derek Halpenny at Bank of Tokyo points out the ECB is less likely to be in favour of this idea than the IMF: “Germany, France and the UK’s exposure to Ireland totals $337 billion as of June 2010 with a good portion of that bank debt.” It would make the remedy part write-off rather than bailout and lead to considerable repercussions elsewhere in the eurozone. As would the possibility, mooted in this morning’s Irish Times, of a full-blown Irish default of the senior bank debt: “Many serious people, in Ireland and elsewhere, have reached the conclusion that the Irish State cannot support the debt burden it has taken on. Flowing from this conclusion comes the view that a portion of that debt must be defaulted on.”
But problems in the eurozone is not the only story: some commentators are also wondering what AUD/USD is doing so close to parity. With Korean altercations giving a negative slant to Asia-Pacific in general, higher inflation and imminent further tightening in China and rather dovish comments from RBA governor Stevens, it looks like the positive carry isn’t enough reason to be long. BNP Paribas sees support at 0.9650 being tested (in fact it is already under threat after this morning’s move) and says: “A break through this important support would suggest that a major top is developing, opening the way towards the 0.9500/0.9465 area.” The bank also likes being short AUD/CAD.
Lastly, Chinese and Russian prime ministers Wen Jiabao and Vladimir Putin met in Shanghai this week and declared that they will be using their own currencies, rather than the USD, for bilateral trade. Another small step in undermining the dollar as the world’s reserve currency.
CNY/RUB: that’s a cross I never thought I’d see.