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Foreign Exchange

Euro hits new lows; forint back from brink

The euro dropped to fresh lows, with positioning in the options markets suggesting plenty of room for further losses, while furious back-pedalling from the Hungarian prime minister pulled the forint away from a record trough.


• Eurozone November retail sales drop 0.8%, more than expected

• Banks’ overnight deposits at the ECB rise to a new high of €455.3 billion

• Hungarian prime minister Viktor Orban says Hungary needs a “quick” deal with IMF and EU, and is ready to discuss conditions

• Swiss December CPI comes in below expectations at -0.7% y/y

• SNB reserves rise to SFr254.2 billion at the end of December, up from CHF 231.6BN in November

• Japan MoF’s Azumi says he is “watching FX-market moves closely” and that the euro’s fall is having a “major” impact on the Japanese economy

Market reaction and flows

EURUSD dropped to a fresh 16-month low on Friday as sentiment towards the single currency continued to deteriorate amid heightened concerns over eurozone sovereign debt and fears about the region’s banking system.

EURUSD fell to a low around $1.2760 in Asian trade, but lacked momentum to push through option barriers at $1.2750 ahead of the release of US non-farm payrolls later in the session.

The impending US jobs data kept FX markets in relatively tight ranges, but news that eurozone banks had placed a record amount of funds with the ECB, and rising Italian and Spanish bond yields, kept the negative sentiment surrounding the euro intact.

EURGBP also dropped through option barriers at £0.8250, helping GBPUSD to trigger stops above $1.5500. However, cable was unable to consolidate its gains, with heavy offers seen around the $1.5520 level.

EURHUF retreated from record highs, dropping to Ft317.00 after Hungarian prime minister Viktor Orban did some back-pedalling, saying the country wanted support from the IMF and hinted at better relations with his central bank after a vote last week that stripped it of some of its independence.

Elsewhere, EURCHF approached the SFr1.2200 level after the spotlight pulled away from the FX dealings of the wife of SNB president Philipp Hildebrand to news that deflationary pressures in the Swiss economy were increasing. The figures should strengthen the resolve of the central bank to maintain, or even raise, the floor in EURCHF.

AUDUSD retreated from its highs around $1.0270 as Asian stocks lost ground, hampered by worries over eurozone debt and unsubstantiated rumours of a nuclear accident in North Korea.

Meanwhile, USDJPY tested higher amid broad dollar strength after Thursday’s stronger-than-expected US private-sector jobs report. Traders said offers around Y77.25 kept the upmove in check, while exporter selling around Y77.50 was also expected to provide strong resistance.


While data from the CFTC shows that short-term speculators hold record short positions in the euro, the options market is telling a different story.

Valentin Marinov, strategist at Citi, says that analysis of price action in three-month EURUSD risk reversals indicates that towards the end of 2011 positioning in the options market turned excessively long of the euro.

“The result is consistent with the drop in EURUSD in December 2011 and the start of 2012,” he says.

“The result could also indicate that positioning, at least in the options market, need not be a hurdle for more EUR downside in the near term.”

 EURUSD 3M RR identified overbought.oversold levels in EURUSD in the past

 Source: CitiFX


All eyes are on payrolls for the option market. Traders say that this week the market has still been trying to find its footing and is not yet ready to commit to a view or theme yet. Vols little changed from Thursday’s close, though were marginally lower, with European stocks opening higher. During the week, vols have eased, EURUSD one-month ATMs opening at 13.4 on Monday and currently trading at 12.55. There was trader talk of barriers at 1.28, followed by 1.27. One trader says: “Breaks of these and you will surely hear ‘should have bought something’.”

That said, Citi strategists made an interesting observation on Friday on EURUSD vols. They argue that while the options market held extreme short EURUSD positions in 2011, some of those positions have now been reduced. That is likely to mean less need from market makers to delta hedge their EUR puts, meaning downward momentum is less likely to stall at key strikes (or key technical levels where many of the large strikes are typically positioned), thus allowing EURUSD spot to drill through key levels on the downside.

This week’s big mover has been EURHUF, with one-month implied opening the week at 14.25 and trading as high as 18 mid. There was some relief on Friday, with EURHUF spot off 2% overnight, and currently trading at 17.

Traders report a large expiry in AUD coming on Friday at $1.03, which is the upper strike of a strangle dealt before Christmas. However, the effect should be largely diluted as this position is well scattered among selling banks.

A globally short gamma position in market makers’ books assumes that hedging takes place along the market direction: a toppish AUD means buying more spot and vice versa. So the price action may be choppy close to the time of expiry. Spot trading was 70 pips off strike in Europe on Friday.

What to look for

Trading the dollar after the non-farm payrolls figures is something of a lottery. It is not always clear how the market will react, given that a good number could lift risk appetite and spur investors to abandon the dollar in search of higher-yielding currencies.

For the CAD, however, the story is much simpler.

Jane Foley, currency strategist at Rabobank, says, based on the fact that the US imports more oil from Canada than any other single country and on Canada’s dependence on the US as an export market – exports to the US account for nearly 75% of the total – signs of recovery in the US economy are undoubtedly good news for Canada and the CAD.

She says while the Bank of Canada might still be a long way from hiking rates, there is no risk of QE in Canada and rates will almost certainly be pushing higher well before Fed funds.

“Better US payrolls data today should push USDCAD lower towards the month’s low near C$1.0077,” says Foley.

Spot 06.30 EST

EUR: Current: 1.2788 Open: 1.2788 Support: 1.2770 Resistance: 1.2860

GBP: Current: 1.5501 Open: 1.5500 Support: 1.5400 Resistance: 1.5550

EURGBP: Current: 0.8241 Open: 0.8255 Support: 0.8200 Resistance: 0.8330

CHF: Current: 0.9519 Open: 0.9525 Support: 0.9310 Resistance: 0.9550

EURCHF: Current: 1.2178 Open: 1.2180 Support: 1.2135 Resistance: 1.2260

JPY: Current: 77.12 Open: 77.15 Support: 75.31 Resistance: 77.50

EURJPY: Current: 98.65 Open: 98.70 Support: 98.45 Resistance: 99.50

AUD: Current: 1.0245 Open: 1.0260 Support: 1.0200 Resistance: 1.0350

NZD: Current: 0.7811 Open: 0.7810 Support: 0.7775 Resistance: 0.7880

CAD: Current: 1.0179 Open: 1.0190 Support: 1.0150 Resistance: 1.0220

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