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Foreign Exchange

Euro rally falters as Hungarian debt crisis intensifies

The euro gave back some of its new year gains as lingering concerns over eurozone debt and worries over the spill over effect of an escalating crisis in Hungary unsettled investors.

Headlines • Germany sells €4.057 billion at bund auction with bid to cover ratio of 1.3, versus 1.1 at last sale

• EU’s Juncker says Europe on the brink of recession

• Hungarian forint dives to record low against euro; cost of insuring against Hungarian default hits all-time high

• Eurozone December services PMI unexpectedly revised higher to 48.8 from 48.3 reported initially

• Use of ECB overnight deposit facility rises to record high of €453.2 billion, up from €446 billion the previous day

Market reaction and flows

The dollar found some support and the euro lost ground on Wednesday as the rally in risky assets that heralded the start of the trading year showed signs of fatigue.

EURUSD rallied after eurozone services PMI was revised higher, but gains were capped as figures from the ECB showed eurozone banks continued to hoard cash with central banks, and a senior European official warned over recession in the region.

Rising Italian government bond yields and a sharp drop in the shares of Italian bank UniCredit also added to nervousness over the eurozone debt crisis and helped push the single currency lower.

Traders noted Middle East bids in EURUSD around the $1.3040 area in early trade, with strong offers around $1.3070 ahead of stops above $1.3100 ahead of a large digital option expiry at $1.3115.

However, as stock markets lost momentum, EURUSD traded down towards the $1.3000 region

GBPUSD also failed to build on its gains, with offers noted around Tuesday’s high of $1.5670. In a similar vein, the rally in AUDUSD stalled ahead of the $1.0400, with talk of large option barriers above that level.

Also adding to negative sentiment were fears over an escalating financial crisis in Hungary after a series of bizarre actions from the country’s government, which culminated in Friday’s decision to limit the independence of Hungary’s central bank.

The Hungarian forint dropped to a record low against the euro as concerns heightened that Budapest would fail to secure aid from the EU and the International Monetary Fund to shore up its finances.

EURHUF traded above Ft319.00 as the cost of insuring against Hungarian government default in the CDS market rose to a record high and the yield on Hungarian 10-year bonds jumped above 10%.

Meanwhile, USDJPY continued to trade with a heavy tone, holding close to the Y76.60 level.


Morgan Stanley’s positioning tracker, which captures a broad range of market participants and brings together six positioning indicators, shows investors’ largest long positions are in the USD and the SEK, while the largest short position in the market is in the NZD.

In the week to January 3, positioning in the USD, EUR and JPY remained little changed. The biggest change was in the SEK, where clients went long, while short positions in the NOK were reduced.

The positioning tracker also showed that GBP short positions were established, while clients reduced long positions in the CHF.

 Morgan Stanley FX Positioning Tracker

 Source:Morgan Stanley



There was talk of $1.3115 strike in the market on Wednesday morning. Evidence of this was backed up by reports that a €1 million payout traded through the broker on Tuesday. Impact on spot is hard to gauge at this stage.

EURHUF is the biggest mover on Wednesday in implied vols, rising one vol to 16.5 in the one-month.

The toppish level of the euro and better-than-expected Spanish PMI on Wednesday morning has seen a continuation of Tuesday’s trend with the emergence of EURUSD vol selling. That has resulted in the vol curve steepening further, with one-month implied down 0.4 to 12.65 and one-year down 0.2 to 14.5.

Traders caution that the curve is too steep and is pricing in too much optimism, and argue that part of this complacency might be due to “holiday-like” trading conditions, and improving liquidity might rectify and trend as long gamma positioning returns. Others note that with EURUSD on the edge of 1.30, the market is not in a stable equilibrium.

Curve flattening trades are therefore recommended, says Société Générale.

What to look for

The Australian dollar has had a strong start to the new year, as global-activity data has surprised to the upside, pushing the risk-correlated currency up to eight-week highs against the US dollar.

AUDUSD is close to testing its 200-day moving average at $1.0416, a technical level that capped the last bounce in the currency pair in December.

Recent breaches of the 200-day moving average in AUDUSD have had a marked follow through, and a breakthrough in the current level could open up a run to $1.0770 – a move which could drag other commodity-linked currencies higher as well.

Spot, 6.30 AM New York

EUR: Current: 1.3015 Open: 1.3052 Support: 1.2970 Resistance: 1.3120

GBP: Current: 1.5630 Open: 1.5650 Support: 1.5550 Resistance: 1.5700

EURGBP: Current: 0.8323 Open: 0.8340 Support: 0.8320 Resistance: 0.8375

CHF: Current: 0.9355 Open: 0.9315 Support: 0.9240 Resistance: 0.9470

EURCHF: Current: 1.2181 Open: 1.2170 Support: 1.2135 Resistance: 1.2335

JPY: Current: 76.62 Open: 76.70 Support: 76.30 Resistance: 78.30

EURJPY: Current: 99.74 Open: 100.10 Support: 98.71 Resistance: 102.50

AUD: Current: 1.0345 Open: 1.0370 Support: 1.0200 Resistance: 1.0415

NZD: Current: 0.7883 Open: 0.7900 Support: 0.7850 Resistance: 0.7925

CAD: Current: 1.0124 Open: 1.0110 Support: 1.0075 Resistance: 1.0150

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