Headlines • ECB should ramp up its buying of troubled eurozone debt to support Italy and prevent a “cataclysmic” euro collapse - Fitch
• Fitch: Greek exit from eurozone possible in 2012 and even a 60% haircut to Greek government bonds will not lead to a substantial reduction of the country’s debt
• Italy’s Social Democrat Party plans to revive itself and calls for the country to abandon the euro and quit the EU – Dow Jones
• German GDP rises by 3% in 2011
• Germany sells €3.153 billion of five-year debt with bid to cover ratio of 2.8 and average yield of 0.9%, down from 1.11% at previous sale
• UK trade deficit widens more than expected to £8.644 billion in November, higher than £8.3 billion expected
Market reaction and flows
USD
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The dollar advanced broadly as the recent rally in risky assets showed signs of fading, with global equities failing to follow US stocks higher. Investor-caution heightened after Microsoft warned over sales in the fourth quarter, and ahead of impending eurozone bond sales.
EUR
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EURUSD traded down from $1.2780 to $1.2730 early in Asia as negative eurozone headlines concerning Greek debt and a push in Italy to exit the eurozone prompted macro funds to sell the single currency. However, traders said corporate demand and buying from Asian sovereign accounts helped pull EURUSD from its lows. EURUSD also found support after solid German growth figures and good demand at a German bond auction, at which five-year yields dropped below 1% for the first time.
Still, EURUSD failed to build on its recent gains, with traders looking for a break of its intra-day highs around $1.2820 to confirm the uptrend in the single currency that has developed this week. Most have put the price action down to short covering and profit taking, noting that there remains good interest to sell the euro on any rally, with offers stacked up above $1.2850.
Caution ahead of Thursday’s ECB meeting and closely watched Italian and Spanish debt auctions kept gains in the single currency in check, before a warning from Fitch over a potential disaster if the ECB did not increase it buying of peripheral eurozone debt sent EURUSD plunging to fresh lows below $1.2700.
GBP
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GBPUSD headed down to session lows around $1.5380, with traders reporting selling interest from a large US name as weaker-than-expected UK trade figures offered sterling little support. Some cited the break in GBPAUD down through A$1.50 as the catalyst for the move, while the Fitch warning over eurozone debt gave the move in GBPUSD added impetus .
CHF
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EURCHF remained close to the bottom of its recent range as markets threatened option barriers around the SFr1.2100 level. Investors seem intent on testing the resolve of the Swiss National Bank to defend the Sfr1.20 floor in EURCHF after the departure of chairman Philipp Hildebrand earlier this week. Most analysts are assuming that the resignation of Hildebrand will have no impact on the SNB’s currency policy, but the price action suggests investors are not so convinced, with large offers reported between SFr1.2140 and SFr1.2160.
AUD
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Asian sovereign demand lifted AUDUSD above $1.0300, but the currency pair was unable to sustain gains around the $1.0325 level, dropping down to $1.0280 by midday in London. Traders see offers around the $1.0350 level, with a more sustained move higher in risk appetite required to lift AUDUSD through option barriers at $1.0400.
Options
Risk appetite continues to drive vols lower this week, and implied vols are capitulating.
USDJPY vols are trading at their lowest since 2007, with the curve down 0.5 on average from Tuesday.
| USDJPY vols at 5-year lows |
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| Source: SG |
The one-month implied vol is at 6.3 and one-year at 10.3. The curve is very steep, as there is a spread of four vols between these expiries, though it should be noted that this is not excessive on an historical basis. One-month realised vols are trading below five, while range trading has driven the one-week vols below two. Also JPY crosses under pressure, with CADJPY being the biggest faller on Wednesday. Positioning
Positioning data from the Bank of New York Mellon’s iFlow report shows real money have continued to buy USD this week while EUR flows have been largely flat.
Flows in and out of risk currencies have been fairly muted, with SEK seeing the biggest cumulative flows this week – further suggesting the market is now very long the Swedish krona. The iFlow data also suggests positioning in CHF might be moving to more neutral levels, as investors reduced Swissie shorts after the resignation of SNB chairman Hildebrand.
In terms of outflows, GBP has seen the biggest move this week, followed by CAD and NZD. Indeed, the market may have been positioned shorter NZD than the latest CFTC data suggested, which may have played a part in helping the Kiwi gain more than 1% on Tuesday after further Chinese easing speculation.
Emerging Markets
This week, Standard Chartered published their inaugural transaction flows report (SCTF) capturing all of the banks’ FX flows in their footprint markets in Asia. The analysis captures the currency flow index versus its one-month percentage change in the average monthly exchange rate, as well as the three-month moving average versus the three-month percentage change in the average monthly exchange rate.
The report shows investors were net sellers in USD-Asia ex Japan with the exception of USDCNH, USDHKD and USDIDR as of the end of November. Standard Chartered analysts say their positioning data appears to provide the best leads and correlation for USDCNY, USDMYR, USDTWD and USDKRW.
They conclude the analysis gives a strongly bearish signal for USDCNY and a strongly bullish signal for USDMYR.
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| Source: Standard Chartered |
What to look for: AUDUSD to break higher
More encouraging signs from China should provide renewed support for AUD.
Morgan Stanley says signs that Chinese monetary policy easing in response to the global slowdown is having boosting domestic activity will be supportive for a selective risk recovery and the AUD in particular.
Hans Redeker, global head of FX strategy at Morgan Stanley, says although December Chinese trade data generated initial concerns given the overall slowing in the pace of growth of imports, the continued demand for raw materials from China will be supportive for the AUD.
“We have raised the entry level for our AUDUSD buying recommendation in anticipation of the AUD resuming its recovery,” he says. “We expect AUDUSD to break higher through the top end of the recent trading range through the $1.0415 area – also the 200-day moving average – opening the way for a more significant rebound towards $1.0650.”
Spot. 7.00am, EST
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