If there ever was a currency trader helpline, chances were during last week you wouldn’t have been patched though. Either way, any dose of counseling wouldn’t have changed the fact that markets resembled battlefields of WWI, with brutality in abundance and stupidity apparent.
Through the week despite ECB’s unwavering support for regional debt ridden economies, markets were choked with negative sentiments, with euro agnostics chanting vividly how they were right all along. In an effort to curb all euro bashing, worried and slightly exhausted EU ministers were holding back-to-back meetings, to deal with the pressing matters of Greece and Portugal, and also to chalk out plans should contagion spread elsewhere. With this rather colorful backdrop, euro eroded 2.5 per cent against the greenback during first half of the week to a low of 1.3836, only to retrace its steps (1.4281) following Fed Chairman’s statement hinting at another monetary stimulus.
Ireland’s downgrade by Moody’s also weighed down on euro, making it the third country from the continent to see its rating slashed to junk within a month. Where Italy’s debt woes seem serious and will keep bubbling in the background, for the time being markets appear to have shrugged off the concern, and subscribed to 2.9 billion euro bond issue by the country, lending some support to the EURUSD. In addition, the defensive move by the Italian senate to pass an austerity budget, with spending cuts of 48 billion euros over three years also calmed the markets a little. Prior to all this however, short covering witnessed against USD on Tue and Wed is not attributable to corrective measures taken by related parties, but squarely reflected weakness of the dollar.
The dollar fell against all major currencies following Bernanke’s remarks to Congress where he signaled another round of quantitative easing (QE3), should economic weakness remain persistent. This is the first time the Fed chairman gave clear signals towards a third economic stimulus. Bear in mind that QE2 just concluded last month, where the Fed purchased over $600 billion worth of Treasury bonds to reduce borrowing cost, support equities, and boost consumer spending. Like clockwork traders responded, sending US stocks and commodities higher, anticipating cheaper financing for US corporates and rushed towards commodities as a hedge against inflation. Gold also hit its all-time high at $1594.27 an ounce on Thursday, and shows no sign of stopping in the coming days. With the current set of problems there is every possibility that the metal would push higher into unchartered territory.
In another move, like a persistent rash refusing to go away, Moody’s rating agency threatened to slash US’s debt rating within the next three months unless US lawmakers break the political stalemate and increase the government’s $14.3 trillion debt ceiling. In this scenario; traders are cautious, moving swiftly when going gets tough towards direction of news breakouts. Yen, likewise, remained strong against the dollar, gaining 2.1 per cent to hover at around 79.08 after touching its highest level in four months although markets seem all too eager to bash USD in favor of JPY. But there is a very high possibility that the Japanese government might intervene to pull yen back from its elevated levels. Yen, just like CHF (Swiss franc), for now appears to be a safe-haven currency for people who do not want to own dollar.
Cable (GBP), fundamentally weak, managed to break away from its consolidation phase against USD, hitching a ride on QE3 bandwagon all the way to 1.6193 on Wednesday from its low of 1.5771 the previous day. GBP has eased off a little since then, but remains highly volatile given the nature of British economy. Inflation at 4.2 per cent is slightly lower on a MoM basis, but still remains on the high side, while increasing unemployment is expected to put further pressure on growth. It is safe to assume that the worst is not yet over, and the pullback witnessed towards end of the week is just transitionary. Overall, markets are rallying massively on either side with clear breakout moves (with few exceptions), marking clear landing strips for traders to maneuver. So, Euro-crisis blockbuster, sequel of the “rating game”, re-runs of “debt ceiling” and “QE in 3D”, all remain much anticipated attractions over the summer months – so better keep your eyes peeled as they might be plenty of opportunities to capitalise on.
Trading Perspective
Try to remain on the thin side of the risk spectrum, avoiding outlandish swing maneuvers, and opt for clear run through major trend rallies. EURUSD remains weak and next week, after traders dissect the stress tests, could potentially set the stage for the next round of euro bashing. However, major support is attached at 1.3890. GBPUSD is expected to be volatile with pressure building up towards the downside.
USDCHF is also expected to continue its downward slide as traders are expected to switch to a safer CHF. As far as USDJPY is concerned, sell into rallies but be cautious as it could snap back if BoJ intervenes.