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Foreign Exchange

IMF bazooka talk squeezes euro short positions

The euro surged higher as the short squeeze in the currency continued on optimism that a deal could be thrashed out between Greece and its bondholders, and that the IMF could conjure up $1 trillion to combat the global financial crisis.

Headlines • Talks resume over private sector involvement in Greek rescue plan

• IMF to propose boosting its lending resources to $1 trillion – Bloomberg

• Japan’s Azumi says yen FX volume much larger than Swiss franc’s, making it “hard” for Tokyo to copy SNB’s policies of putting a floor in EURCHF

• World Bank cuts global growth forecast by most in three years; sees 2.5% growth this year versus 3.6% in June estimate

• Overnight bank deposits with the ECB rise to new record high of €528.184 billion

• UK December unemployment at 8.4%, higher than 8.3% expected

Market reaction and flows


The dollar remained on the defensive as risk sentiment was buoyed by growing investor confidence that the global economy could be approaching a cyclical turning point.

Optimism that the slowdown in global growth in the second half of 2011 will be followed by a healthy rebound this year has been boosted by a string of robust US economic figures and growing hopes of a soft landing in China.

More pressure was heaped on the dollar as headlines suggested the IMF was looking to boost its lending firepower to $1 trillion and was hoping to strike an agreement at next month’s G20 meeting in Mexico City.


EURUSD traded higher as negotiations with bondholders over private sector involvement in a Greek bailout resumed ahead of large bond redemptions in March.

There were conflicting reports over the size of the haircuts that bond holders were prepared to take. Nevertheless the market appeared to be taking the view that any sort of deal would be positive for the euro and risky assets.

EURUSD ran up above $1.2800, with traders noting strong demand from an Eastern European account.

The IMF headlines pushed EURUSD another leg higher, with heavy buying from an Asian name triggering large buy stops in the $1.2815-$1.2825 region.

Traders noted real money offers between $1.2850-$1.2860, with strong technical resistance around $1.2880-$1.2900.


GBPUSD took its lead from risky assets, trading higher before finding good selling interest around the $1.5370.

The pound suffered elsewhere as figures showed UK unemployment rose to its highest level since 1995, heightening expectations that the Bank of England could further expand its quantitative-easing programme.


Rising risk appetite kept the yen under pressure, seemingly doing the heavy lifting for Jun Azumi, Japan’s finance minister, who has been vocal over the strength of his currency as EURJPY broke down through 11-year lows this week.

Azumi ruled out putting a Swiss-style floor in EURJPY on Wednesday, however, saying the size of the yen market made such a prospect untenable. That would seem to imply that Japan will continue with its sporadic, and less than spectacularly successful, interventions in USDJPY in an effort to check gains in the yen.

Nevertheless, improved risk sentiment pulled EURJPY up towards Y98.50 and helped USDJPY test Y76.80.


EURCHF was largely contained in a SFr1.2090-SFr 1.21 range, as opposing forces kept the pair in its tight range. Traders say offers continue to linger from 1.2120 reportedly on behalf of speculative funds still willing to test the Swiss National Bank's resolve to defend its SFr1.20 floor.

At the same time, other accounts are said to have built up long EURCHF positions on the premise the SNB will defend downside ahead of SFr1.02050 options and the lower limit at the SFr1.20 figure.


Aussie received a strong boost after the IMF headline, helping AUDUSD rise 50 pips to 1.0425 where the rally lost steam as the 200-day moving average, at $1.0411, offered firm resistance. AUDUSD subsequently reversed some of the initial move but managed to trade firmly above the $1.04 handle.

The Aussie’s recent trading behaviour suggests it has been trading with greater sensitivity to risk-on positive headlines than to negative news, which is likely down to the fact that US, and recently Chinese, economic data has surpassed expectations in recent weeks.

“The better-than-expected data is supporting the market more generally and to some extent providing a floor to risk sentiment as the tail-risk of global recession shrinks,” says Henrik Gullberg, strategist at Deutsche Bank. “This means the Aussie and other risk proxies are less restrained when rallying on the back of positive news flow.”


The latest iFlow report from the Bank of New York Mellon, capturing the bank’s custodian foreign exchange flows over the past week, shows USD, JPY and EUR flows have been largely flat, with a small bias towards dollar selling.

The biggest cumulative inflows seen this week are in CAD, followed by SEK and then AUD, while GBP has been subject to the strongest outflows, mirroring last week’s action.

In emerging markets, the BNY data shows the strongest inflows this week have been into INR, ZAR and BRL, outpacing the previous week’s inflows in each case. IDR suffered the largest cumulative outflow this week, though this was by half the amount seen last week.


The biggest vol mover in the past 24 hours has been USDJPY. Vols continue to soften, as Lunar New Year week in China approached, and so the prospects of intervention seem to be less likely, note traders, who point out that butterfly are pricing lower. One-week and one-month vols are trading as low as 5.5 and 6.5, with one-month down 0.5 overnight, a considerable move given the low nominal levels of vols.

Another trader reports a large seller of two-month ¥78.50 strikes.

What to look for: AUD vulnerable to short-term correction

With this week’s Chinese data effectively pushing investors to price out expectations of a hard landing, the medium-term prospects for AUD remain solid, says Steven Saywell, head of FX strategy at BNP Paribas.

However, he says long-market positioning in the AUD is stretched and it will be vulnerable to any news that suggests a weaker global growth trajectory.

“Labour market data tomorrow will be key in shaping RBA policy expectations – a 25 point cut is widely expected in February,” says Saywell.

“In the meantime, the AUDUSD 200-day moving average at $1.0411 – Tuesday’s break above was not sustained – will remain a key focus. We remain cautious and continue to suggest using cheap options to hedge AUD assets.”

Spot 6.30 EST


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