FX markets were very quiet yesterday with closes to zero data or news stories to spark any kind of directional volatility. Without any real drivers, FX pairs just bounced around with flows on the light side. Overnight, EURUSD ranged between 1.2994 and 1.3020 for most of the session while AUDUSD roamed around 1.3010 handle. News agencies tackled the death of Kim Jong-Il with as much zeal as they could muster, but with little spillover effect into the financial markets. Kim Jong Il's youngest son, Kim Jong Un, was later named and praised by North Korea's official news agency KCNA as "the outstanding leader of our party, army and people". Initially there were some worries of instability and generally fears of a disorderly succession, as missiles were reported to have been launched from North Korea. I guess we have been so focused on European credit concerns for so long that an old fashion geo-political event like this had a hard time attracting trader’s interest.
In Asian session, RBA minutes came in slightly less dovish then the market had anticipated. At the December meeting, RBA members discussed possibly holding off easing since the economy was expanding at decent pace and mining boom was in full swing. However Europe weighed heavily on the central banks minds and provided the tipping factor stating “developments in Europe continue to pose the downside risks to the global economy” and “these risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict". Reaction in AUD was muted with no real spillover effect into the already slightly bullish AUDUSD. Markets are still pricing in nearly 75bp of easing by Q2 primarily due to the uncertainly in Europe. We suspect this is slightly over done give the steady demand for commodities expected next year.
In regards to Europe which at this point has been put on the backburner as market head to the holiday early this year, Eurozone sovereign bond yields have dropped, indicating that investors expect the ECB's new extended lending program to get banks to become more aggressive in buying debt. This might have been the motivation for the ECB's Draghi to indicate in a FT interview that the new facility is ‘obviously not at all an equivalent to the ECB stepping up bond buying’. He went on to say "The important thing is to restore the trust of the people - citizens as well as investors - in our continent. We won't achieve that by destroying the credibility of the ECB." There is still a segment of the market that expects the ECB to come riding in on a white horse, but we see this as misguided. In 2009 the ECB decision to expand maturities did stimulate banks to buy sovereign debt however, back then the focus of the risk was not the underlying nations. European AAA was still considered risk-free. That’s clearly not the case anymore, with the stakes on sovereign credit has been raised significantly higher. Most recently trigged by Fitch putting several Eurozone countries on the negative watch list, including France, traders have been actively discussing the effect of a real French credit rating downgrade. In our view, the direct pricing effect will be limited as a large part of the cut has already been priced in. However, the psychological effect of one of the strongest EU nation getting dragged lower by the supporting unions will discourage other nation’s from quickly lending unconditional support to the weaker countries. The ECB's Noyer provided the day’s positive skew, stating that ‘progress on Euro governance makes him optimistic.’ We are not sure anyone heard him.
Perhaps the most interesting currency pair to watch is the EURCHF. Since the SNB's decision to not adjust the EURCHF “floor”, speculative long positions have been rapidity cut. The untested 1.2000 level doesn’t look too distant as the markets pushed the pair aggressively to 1.2177 from 1.2393. In an effort to provided verbal support, the SNB chairman Hildebrand stated that the SNB would do ‘all it can’ to defend their exchange rate target. However, the overall effect was muted. 1.2120 should provide some support, but a break could get ugly--finally testing the SNB official line in the sand.
By
M.Zohaib Gadit
Forex Trading Consultant
In Asian session, RBA minutes came in slightly less dovish then the market had anticipated. At the December meeting, RBA members discussed possibly holding off easing since the economy was expanding at decent pace and mining boom was in full swing. However Europe weighed heavily on the central banks minds and provided the tipping factor stating “developments in Europe continue to pose the downside risks to the global economy” and “these risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict". Reaction in AUD was muted with no real spillover effect into the already slightly bullish AUDUSD. Markets are still pricing in nearly 75bp of easing by Q2 primarily due to the uncertainly in Europe. We suspect this is slightly over done give the steady demand for commodities expected next year.
In regards to Europe which at this point has been put on the backburner as market head to the holiday early this year, Eurozone sovereign bond yields have dropped, indicating that investors expect the ECB's new extended lending program to get banks to become more aggressive in buying debt. This might have been the motivation for the ECB's Draghi to indicate in a FT interview that the new facility is ‘obviously not at all an equivalent to the ECB stepping up bond buying’. He went on to say "The important thing is to restore the trust of the people - citizens as well as investors - in our continent. We won't achieve that by destroying the credibility of the ECB." There is still a segment of the market that expects the ECB to come riding in on a white horse, but we see this as misguided. In 2009 the ECB decision to expand maturities did stimulate banks to buy sovereign debt however, back then the focus of the risk was not the underlying nations. European AAA was still considered risk-free. That’s clearly not the case anymore, with the stakes on sovereign credit has been raised significantly higher. Most recently trigged by Fitch putting several Eurozone countries on the negative watch list, including France, traders have been actively discussing the effect of a real French credit rating downgrade. In our view, the direct pricing effect will be limited as a large part of the cut has already been priced in. However, the psychological effect of one of the strongest EU nation getting dragged lower by the supporting unions will discourage other nation’s from quickly lending unconditional support to the weaker countries. The ECB's Noyer provided the day’s positive skew, stating that ‘progress on Euro governance makes him optimistic.’ We are not sure anyone heard him.
Perhaps the most interesting currency pair to watch is the EURCHF. Since the SNB's decision to not adjust the EURCHF “floor”, speculative long positions have been rapidity cut. The untested 1.2000 level doesn’t look too distant as the markets pushed the pair aggressively to 1.2177 from 1.2393. In an effort to provided verbal support, the SNB chairman Hildebrand stated that the SNB would do ‘all it can’ to defend their exchange rate target. However, the overall effect was muted. 1.2120 should provide some support, but a break could get ugly--finally testing the SNB official line in the sand.
By
M.Zohaib Gadit
Forex Trading Consultant
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