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Foreign Exchange

FX research roundup: G20 to fiddle as Ireland burns

Lee Hardman at Bank of Tokyo Mitsubishi UFJ started the week well by repeating his call for the top of EUR/USD: “We remain convinced that EUR/USD is very close to peaking, currently providing an attractive opportunity to sell.” He doesn’t mince his words and, as the rate was above 1.3950 at the start of the week, can claim to have called it spot on.

 

It appeared all of a sudden that QE2 was old news and the sole focus was the Emerald Isle. You know for sure you are in trouble when the Greeks keep their distance as happened on Monday afternoon. Finance minister Giorgios Papaconstantinou stated: “Greece is not Ireland”. Nor, one might add, is ouzo Guinness. Apparently Papaconstantinou’s point was that the Greek banking system hadn’t “got ahead of itself”. Not like the Irish, at least. But then the Irish government could say that it hadn’t got ahead of itself as much as the Greeks. Not that that would mean anything either.

 

But Irish woes continued to weigh throughout the week. LCH Clearnet made eyes water on Wednesday when the clearing house raised margin requirements to trade Irish government debt by 15%. Not that this should have been surprise: LCH had announced in early October that it would impose such requirements on any government bond that yielded more than 450 basis points. The only real question was why something hadn’t been done a couple of weeks ago. Although LCH maintained that the action helped the troubled bond market, the spot market didn’t consider that it helped the troubled euro, leading EUR/USD to dip under 1.3700 for the first time in a while.

 

It isn’t as if everything Stateside is peachy, but the Chinese rating agency’s downgrade of the US was seen as an amusing side-show. Perhaps it is yet another precursor to the Seoul jolly-up. More interesting was Moody’s optimism in upgrading China early on Thursday. And Thursday itself was slightly anti-climactic being the Memorial Day holiday in the US and the first day of the G20 – a mere 24 hours before the deluge of soundbites begins.

 

Which brings us to today, Friday. Irish CDS are at record highs, as is the bond spread, and there is talk of an imminent bailout. The Irish finance minister has just gone on the wires stating that “market talk that a bailout is being hammered out with EU is untrue”. As Mandy Rice-Davies said: “He would say that, wouldn't he?” There is a Eurogroup meeting on November 16, although if Ireland gets bailed, the focus will turn to Portugal and Spain, unless the G20 manages to pull a massive rabbit out of the hat.

 

Nomura, quoted on FTAlphaville’s Macro Live, has positive expectations of the summit, but when scrutinised they don’t amount to much. In summary: some progress on financial regulatory reform; improved rhetoric on capital flows and imbalances “matched by suitably nuanced communiqué language”; the US and EU to ensure that China’s exchange rate policy remains on the agenda; restrictions on capital flows “to remain relatively mild, largely rhetoric and non-binding”; “further gestures of reconciliation”; and “a number of other agreements surrounding development, climate change and moving towards the Doha trade round can be expected”.


Nick Parsons at NAB has fewer expectations or a more cynical point of view. He sees no change to the results of previous summits: i.e. “grandiose pledges” promising little of substance. In Pittsburgh, “they all agreed to do whatever they wanted or felt appropriate for themselves”, and much the same in Toronto. Parsons’ judgement is brutal: “It doesn't require much textual analysis to see that these so-called agreements are not worth the paper they are written on”. For Seoul, Parsons predicts a communiqué that “will be full of vacuous platitudes which will do absolutely nothing to reassure febrile financial markets.”


We’ll see soon enough.

 

Following Parsons to the end (after all, you don’t want to cut what Parsons knows), he points out: “There are 49 days to year-end” and that the last couple of months have been risk-friendly and profitable. At some point there will be a pre-Christmas “huge liquidation sell-off”. Meanwhile, however, Parsons cautions that those considering buying into the latest risk-off dip might want to “take a look at a daily chart of cotton futures and go and have a lie-down instead.”

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