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Foreign Exchange

Chinese growth drives risk currencies higher

The euro and growth proxies rallied as markets shook off S&P’s credit downgrades for France and the EFSF choosing to take heart from better-than-expected Chinese growth figures. A good Spanish bill auction and surge in German ZEW investor confidence helped buoy overall risk sentiment.

Headlines • Chinese growth slows to a stronger-than-expected 8.9% in the fourth quarter

• S&P cuts rating on European Financial Stability Facility (EFSF) to AA+ from AAA

• Japanese finance minister Jun Azumi says “Japan has bought [EFSF bonds] by certain amounts and our stance will not immediately change just because of the downgrade”

• Eurozone banks’ overnight deposits at ECB rise to a record €501.933 billion

• UK December CPI 4.2% y/y, in line with forecasts

• Spain sells €3.007 billion of 12-month bills at an average yield of 2.049%, down from 4.05% at the previous auction


USD The dollar underperformed overnight as investor sentiment improved and caused investors to cover long USD holdings and abandon safe dollar holdings, and move into foreign assets. Asian equities gained 1.6-4.2% with Europe’s Stoxx 600 equity index gaining 0.75%, breaking through its 200-day moving average and hitting a five-month high of 253.25.


EUR The euro strengthened against haven currencies, the US dollar and Japanese yen, while the pound was boosted initially by China’s growth numbers, and then by a successful Spanish auction and an improvement in investor confidence captured by the German ZEW Survey which came in with a reading of -21.6 versus the expected -49.4.

EURUSD triggered stops through $1.2700 and $1.2750 as offers from CTAs and short-term accounts swiftly filled as hedge funds and sovereign demand dominated in early Europe scrambling to cover overstretched short positions.

Traders say that offers are tipped at $1.2800 and beyond this lies strong natural sell interest from $1.2850 upwards.

While the broad risk on tone helped markets shrug off the France and EFSF downgrade by S&P, an impasse on negotiations surrounding a restructuring of Greece’s debt will remain a source of anxiety and leave the euro vulnerable.


AUD The Australian dollar was the main beneficiary of rising risk sentiment, with AUDUSD breaking through $1.04 and testing resistance at $1.0420 – its 200-day moving average – in the early London session. Positive Chinese growth buoyed equity markets and helped pave the way for a broader commodity bloc rally, with NZD and CAD also seeing large gains, with NZDUSD breaching $0.80 and USDCAD testing $1.0110.


GBP GBP was little changed after UK CPI fell sharply but was in line with expectations. GBP was boosted by the improved risk backdrop that helped GBPUSD reach a high this week of $1.5390 but offers around the $1.54 figure as well as a rise in EURGBP through £0.8300 limited gains.

The fall in CPI, in line with the Bank of England’s own forecasts, is likely to reinforce speculation of further quantitative easing, which in past instances has done relatively little to weaken the currency beyond an initial announcement effect.

Economists say reduced price pressures in the UK is also in positive, insofar as it can increase disposable incomes, though a fragile jobs market is still seen as likely to hamper consumption and economic activity, as well as negative spillovers from the eurozone.


JPY USDJPY traded heavily as dollar weakness outstripped demand for yen crosses. However, traders said large bids from semi-official accounts around ¥76.50 were supporting USDJPY, as they looked to protect stops below.

EURJPY held well above ¥97, under which traders reported talk of large stop-loss orders and broke through ¥98 as the euro’s rally gathered pace.

EURJPY found support from improved risk appetite and also continued jawboning from Japanese finance minister Azumi, who has expressed increased worries as the cross has dropped down through 11-year lows.

Azumi helped EURPJY higher, saying the EFSF downgrade would not change Japan’s stance on purchasing the rescue fund’s debt and that he would monitor FX moves before deciding on whether to intervene in EURJPY.


EURUSD volatility and risk reversals drift lower, with the EFSF firmly priced into markets and having little effect on vols. “The euro is toppish today despite the EFSF downgrade, so vols cannot reasonably go higher,” says Olivier Korber, derivatives strategist at Société Générale.

EURUSD one-month vol is approaching 12, just half a point above the recent low bound and the risk-reversal curve has moved 0.2 vols lower with the one-year risk-reversal now -2.15, the lowest level since June 2011.

“The skew is now extremely soft but we do not believe that it will break the -2 threshold on the one-year expiry,” adds Korber.

Chinese data has helped USD/Asia vols move significantly lower. Volatility in the Korean won, strongly correlated with EM equities, fell by the most, with one-month down 0.8 from yesterday at 10.3 as the EM stock markets rallied this morning.


Morgan Stanley’s FX Positioning Tracker, which aggregates data from a variety of sources, shows currency positions have shifted materially since January 9.

EUR positioning moved deeper into short territory, with both IMM accounts and investors on the Tokyo Financial Exchange (TFX) aggressive sellers of the single currency.

Positioning in USD was scaled back from extreme long territory. The move was driven by selling from Morgan Stanley’s clients and by investors on the TFX.

AUD positioning shifted from neutral to long, with the currency finding broad-based support as positive sentiment increased.

Morgan Stanley calculates the largest long positions to be in the USD and the JPY. The largest short positions are in the EUR and CAD.

 Source: Morgan Stanley

What to look for: SEK rally to falter

Signs are emerging that the rally in the SEK, which has seen it reverse 50% of the trade-weighted decline it suffered between March and November, might have run its course.

The catalyst for this exhaustion in the SEK uptrend appears to be renewed investor concern regarding Sweden’s trade exposure to Europe, with last week’s poor November industrial and orders data rekindling growth fears.

“Previously, we had anticipated SEK weakness as the currency’s role of buffering local exporters from slowing growth in Europe rose to dominance,” says Adam Myers, strategist at Credit Agricole.

“Against such expectations, however, this role appears to have remained secondary to investor diversification inflows, prompting a 3.7% SEK appreciation since November.”

Myers believes, with Swedish growth fears coming back to the fore, SEK’s buffer role could re-exert its dominance.

“We therefore look for SEK weakness to return, and recommend long NOK/SEK as a way to play the SEK reversal,” he says.

Spot, 6.30, EST

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