The currency blog

Keep your hard hats on, the crazy levels of volatility across the FX markets will continue today as we look forward to the US employment number this afternoon. It will be nice to get back to economic data driving moves in currencies, given trading has been totally dominated by central bank announcements and political news hitting the wires.  In no particular order, the market moving events have been US Fed Chairman Bernanke speaking yesterday, the Chinese premier suggesting they may invest further in the European bail-out fund (after a quick whisper in the ear by German Chancellor Angela Merkel) and the will they won’t they saga still playing out over Greece. Throw some disappointing American data into the mix, stir together and sit back and watch the Euro-Dollar move like a yo-yo.

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The Bulls re-entered the ring yesterday as the markets took a more optimistic view on global growth, in addition concerns on the Euro zone debt crisis eased. The move into risk was prompted by a series of positive manufacturing reports from around the globe, in particular China’s PMI data remained positive. The pound was bolstered by a rise in manufacturing activity for the UK last month showing output expanding at the fastest pace since March last year- this helped the pound hit a 2 month high against the US dollar. In fact the US dollar lost across the markets, a rise in US manufacturing activity alongside China’s data helped swerve the markets into risk on mode which is USD negative. Not surprisingly the USD lost against the usual suspects- the Pound, Euro, Australian dollar and other commodity based currencies and emerging market currencies. Read the rest of this entry »

Wednesday trading began where it finished on Tuesday with the Euro still tittering on a knife edge while Euro leaders wait for an agreement to be reached over the Greek debt deal. Discussions have been taking places for weeks now with Greek Finance ministers trying to arrange a significant cut in their debt to GDP ratio. Comments from these meetings have been released on a daily basis with the latest remarks stating that talks will conclude “very soon”. However, until this is signed off, risk to the Euros future still exist with the potential for a Greek default growing with every week that the Greek debt isn’t cut.

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Europe took a major step towards greater fiscal integration overnight, as all EU members except the UK and Czech Republic agreed to measures to reduce budget deficits and allow greater oversight by the European commission. The pact should be in place by March with the ratification and implementation to follow shortly after.  Automatic fines of around 0.1% of GDP will be levied on countries who fail to reduce their deficits by the agreed proportions.  The fines smack of a token gesture given it will be one of the PIIGS that fail the tests and clearly they would not be expected to pay, and the fact that the Maastricht treaty imposed broadly similar rules which were blatantly broken by all member states is one of the reasons Europe finds itself in its current state of woe. As with recent EU meetings, the news will likely trigger a short lived Euro bounce before selling pressure resumes.

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The Federal Reserve minutes from the meeting earlier this month were released yesterday evening and after several months of treading water the Fed decided to change its wording on interest rates. The Fed now plans to keep rates at extraordinary low levels until the end of 2014, which is a year further than their previous stance and signals to the markets that the Fed will continue to provide a huge amount of monetary support even as the economy is recovering. The consensus was that the Fed would begin to withdraw support once they thought the economic recovery had gained traction but yesterday’s announcement has realigned the market view to expect low interest rates for a long time to come. The immediate reaction in the markets was positive with stock markets rising and a large move in the EUR/USD pair from 1.29 to over 1.31, which given the size of the move we can expect slight retrace back towards the 1.30 level during today.

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The Euro enjoyed its first strong day of 2012 yesterday with signs that some confidence could be returning to the single currency. One of the main topics of discussion at the moment is the ongoing Greek debt deal. Negotiations had taken a turn for the worse over the weekend after the authorities asked investors to accept new bonds yielding 3.5% rather than the previously agreed 4%. The Greek government had hoped to complete talks by Monday, but as yet, no agreement has been made. However, Greek finance minster Evangelos Venizelos said progress was being made and this was one of the main reasons for the Euro strength. He has now set a new date of 1^st February to conclude talks. Although these comments have improved the confidence level of a deal being agreed, until any deal is signed, expect the Euro to remain weak as the threat of a default is still alive.

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