The currency blog

In relation to their wholesale funding levels plus Intel’s very, positive 4th Quarter earnings report. These followed yesterday’s potential mine-field that was the ECB meeting. The market mover however, was a rumour that went round the Far East in the early hours that the German Chancellor, Merkel, was ready to resign her position. This appears to stem from a report in Time magazine that was negative on the support that Frau Merkel is currently receiving. This rumour was swiftly denied by a German Government spokesperson but the damage was done and the Euro dropped sharply all round. In fact the move was then compounded as traders re-visited the comments from Trichet in his post-ECB policy meeting press conference. Although he had said, when grilled by the reporters about Greece’s debt problems and the possibility of the country dropping out of the Euro, that he did not comment on ridiculous hypotheses, the whole question of Eurozone sovereign risk and the support that namely Greece, Portugal and Spain currently enjoy, was brought back to the table.

Sterling enjoyed a good spell and with the 200-day moving average at around 0.8850 being breached, traders saw a raft of stops taken out and a quick dip down to the 0.8825 Euro technical support. A weekly close beneath 0.8825-30 suggests a move lower towards 0.8500 but I feel that this is a move too far. The whole Greek/Portuguese situation has been overdone and it would not surprise me to see traders looking at current rates as an opportune level at which to re-establish Euro long positions.

The one region within which a weak Euro might persist in the short term is the Far East where data coming through from China and the situation in Japan with the wind up of Japan Airlines might suppress and Euro recovery until next month. Next Thursday, China are scheduled to release their 4th Quarter GDP figure with market consensus looking for reported growth of 10.5%. The odds however are for an even stronger outcome and markets could react very positively towards the regions currencies and commodity currencies against those of the industrialised West. In The Land of the Rising Sun, next week should see further developments in the winding up of Japan Airlines. Reliable rumour has it that the company’s commercial activities, including their oil and fuel contract will be 100% guaranteed but that their forex hedges will be required to be unwound. This could mean the company needing to sell USDollars against the Yen.

As expected yesterday, there was no change to the ECB’s policy interest rate and Trichet’s post-announcement was largely uneventful. Although he managed to achieve a balanced tone to his testimony, it was apparent that he was not overly concerned on imminent inflationary pressures within the zone. He acknowledged that current fiscal problems are placing a considerable burden on monetary policy but that individual States’ current difficulties would not cause the ECB to require a change in the collateral framework of any country.

Today at midday we are due to get the earnings report from JP Morgan and let’s be serious, no one is interested in what they made, just how much they have earmarked to give in pay and bonuses against the backdrop of Obama’s tirade yesterday. We are also scheduled to get some US economic data and the University of Michigan survey, all mid afternoon.

Discuss on this on the Currency Exchange Forum