Headlines • Italy to receive €600 billion loan from IMF, says La Stampa, but IMF denies talks
• Core eurozone countries to consider “elite bonds” to stabilise AAA bond markets, says Die Welt
• Belgian authorities agree budget deal for 2012, paving the way for new coalition government in a move seemingly triggered by S&P downgrade
• US reports record sales on Black Friday, up 6.6% year on year to $11.4 billion
• China Investment Corporation, the country’s $410 billion sovereign wealth fund, announces plans to invest in UK
• UK government claims pension funds ready to invest £20 billion in infrastructure projects
• OECD warns over double dip recession in UK, says eurozone in mild recession
• SNB’s Jordan: SNB ready to act if CHF strength threatens growth outlook
• China’s renminbi is getting close to the equilibrium value, a Chinese government think-tank economist says, refuting the US accusation that the currency is undervalued
Market reaction
Traders pared short positions in the euro on Monday as a stream of stories in the press over the weekend suggested that European authorities were attempting to get to grips with the escalating debt crisis in the region.
EURUSD pulled back sharply from its Friday lows around $1.3210 on reports that the IMF was preparing a €600 billion rescue fund for Italy and that core eurozone countries were set to issue joint AAA bonds to raise funds to bail out the periphery of the region.
The fact that both stories were denied did little to impede EURUSD’s advance, with the single currency rising to highs around $1.3380 amid optimism that the sheer volume of positive news meant European leaders were becoming galvanised to shore up the single currency.
Also helping to support the EUR was a sharp rally in global equities, with European stocks surging higher after losing ground every day last week.
Stocks were supported after record spending in the US on Black Friday, seen as the start of the Christmas shopping season, raised hopes over the health of the global economy.
USD and the JPY fell broadly, reflecting the improvement in risk appetite, with growth sensitive AUD and NZD surging 1% higher from last week’s lows.
Elsewhere, GBPUSD found support as China announced support for UK government plans to boost infrastructure spending.
CHF also found support against the dollar, but EURCHF traded down to CHF1.2280 as the effect of rumours late last week that the Swiss National Bank was preparing an imminent rise of its EURCHF floor to 1.25 ran out of steam.
Flows
EURUSD ran into buyers at $1.3280 as risk appetite improved after a flurry of positive news for eurozone rescue plans and a rally in Asian stock markets.
Euro buying tapered off in the Asian afternoon as denials about the IMF loans and eurozone “elite bonds” were denied but strong rallies in European stock markets and an improved tone saw the EURUSD climb past $1.3370 in London.
Reports of month-end-related demand for EURGBP from a European national central bank added some support.
Month-end-related dollar selling at today’s ECB and London fix might see the pair gain further supportive flows.
There was firm interest in the leveraged community in EURUSD buying, with macro accounts reportedly buying in large size.
Similarly strong AUDUSD buying among short-term, leveraged and model accounts helped the pair recover from severely oversold levels, with the pair once again chasing parity. Buy stops triggered around 0.9850, although order books show offers above 0.9950-1.00.
Friday’s reports that BoJ asked Japanese banks to help with intervention deterred yen sellers, although traders say there has been real money demand on dips.
GBPUSD saw supportive bids as the euro backdrop improved. Cable rallied up to 1.5570, although offers remain at 1.56, given the negative outlook for the UK economy, with the latest OECD report warning it expects a double-dip recession.
Positioning
CFTC IMM report delayed. Deutsche Bank’s internal positioning monitor shows the dollar long was reduced towards the end of last week, as well as the euro short.
Deutsche Bank, Barclays and UBS all noted the EUR found good buying towards the end of last week, despite an apparent intensification of the crisis. This was in the form of several take-profit orders rather than bullish sentiment.
Although there was quite a lot of profit taking, the leveraged community continued to be sellers of the euro and remain net short, according to DB’s internal platforms.
Sterling and yen held on to a stable short while positioning in commodities moved somewhat.
DB’s analytics show the Aussie has now moved to a small net-long for the first time in several weeks.
Meanwhile, oil currencies are generally well supported. The CAD long and MXN long were added to. Positioning in Skandies remains roughly flat.
Options
While risk on theme dominated in spot, options market seeing a very quiet start to the week, with light flow.
Right across the curve vols look virtually unchanged in Europe, after beginning the session slightly higher, after a bid tone in the Asian session, traders say. 1-month trading 15.45 mid, and 1-year 16.5 mid, unchanged from the Friday close.
Swaps
The three-month FRA/FX basis narrowed on Monday, but not by as much as traders might have anticipated given the positive news. The basis was trading at -146 basis points during the London morning, after trading as wide as -160bp on Friday on very thin trading, before it rallied to -150 later in the trading session. One trader says he would have expected the basis trade to go back to the -135/-140 area. Forwards traders report very light volumes and say it feels like not many interbank guys have the inclination to take this on.
What to look for
Pessimism towards the euro would seem to be universal; accordingly, the single currency looks vulnerable to short-term position adjustment.
That is especially true of the coming session, notwithstanding hopes over any resolution to the eurozone’s debt problems, with spot trading with a value date of November 30 on Monday.
Traders who have enjoyed the recent sell-off in EURUSD are likely to book some month-end profits today.
That should rule out an attempt down towards the October low of $1.3146 in the coming session, but as the new trading month gets under way on Tuesday, that level could look vulnerable once again.
Spot, 6.45am, EST
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