The yen taking the best performer prize and euro recording its biggest five-day drop against the Swiss franc since it fell 4.2 per cent during the week ended Sep 2 don’t speak too well of last week’s risk-on reprieve. Friday’s 1.3705-1.3898 rally in the euro, supposedly on hopes associated with upcoming EU meetings, more likely betrays trader anxiety over holding the long position over another euro congregation weekend. The hesitation is expressed in the single currency’s rumour-driven directionless trading between 1.3915 and 1.3650, ending the week more or less where it started.
Dollar weakness also owes to Fed vice chairman Yellen’s suggestion of initiating a third round of large-scale securities purchase, effectively conceding failure in handling unemployment and overall financial turmoil. Dollar deflation continues to feed on the Japanese yen, still the suffering refuge of safe-haven trading, Yet Japanese finance minister Jun Azumi’s promise of ‘decisive action against excessive and speculative yen moves’ rules out a short dollar-yen trade in the immediate term, even if traders have repeatedly benefitted from calling Tokyo’s bluff on intervention threats. With the dollar touching 75.78 against the yen (surpassing the record Aug 75.94 low), and forex movements eroding companies’ earnings while economic fundamentals remain weak, a kamikaze chop typical of the Japanese cannot be far.
The meat of forex market news continues to flow from Europe, with heads of states, central bankers, etc, rushing three more meetings in half a week. While these may end hesitant, rang-bound EUR/USD trading, I doubt Europeans’ ability to engineer long-lasting risk appetite, not when six months of meetings have been unable to generate continental consensus on the stability fund and bailout stress is pressuring fragile coalitions in premier economies. Also, rhetoric aside, there is practically zero chance of establishing a fund big enough to support Italy, Spain and (yes) France when push comes to shove. With fund extension, private sector haircuts and ECB level of bailout engagement still bitterly debated over Greece (0.6 per cent of euro zone GDP), the best these meetings can accomplish is what they have been accomplishing for half a year – carefully engineered risk-on windows by carefully worded statements. Papandreou’s success in securing lawmaker-majority for austerity reforms, just as police tear-gassed protestors, typifies Europe’s paradoxical response, the basis of rubbishing the long-euro argument.
While the euro may well rally in bursts after the meetings, its best to use the bid to set up strategic long-term shorts on the single currency. The bailout fund will not be large enough to support hemorrhaging banks, and then sovereigns. The need for fiscal union will present itself soon enough, but long gestation periods in incorporating constitutional reforms will rule out an immediate cure for the currency crisis. Greek and Italian austerity measures will accomplish little save shaving more points off GDP growth, even if Osborne’s cuts have ignited a rally in sterling. But Britain has the great advantage of not tying its balance of payments fortunes to peripheral compulsions. It is not associated with the single currency project that, far from ensuring continental solidarity, has become the monetary fissure breaking it apart. Cable is a cautious buy, but optimists should not stay long longer than the EU meetings, since sterling has already started correlating with the euro again. Ditto, strangely, for commodity currencies, as unnerved with the risk pendulum’s swings as analysts noting increasingly little intrinsic bid in increasingly short-lived risk appetite opportunities.
