IG Markets: ForEx Thoughts 13/09/2011

EURUSD

The euro took a rest bite from the extensive sell-off we have seen in recent days, as speculation of China potentially buying Italian debt saw a bid spread through risk assets. EUR/USD traded to an overnight high of 1.3695 and remained volatile going into Asian trade, although it clearly remains oversold after the massive falls we have seen. Recent CFTC data has shown a big pick-up in euro short positions, so it does not take much to see traders look to cover those positions when good news breaks. Credit default swaps are now pricing in a 98% chance that Greece will default on its debt in the next five years, however looking ultra short term, the market is concerned that Greece will not get its next bailout funds given it has already missed its recent budget targets. Over the weekend, Greek officials imposed a property tax with the idea to plug a two billion euro hole in its 2011 budget and win over support from the ECB, EU and IMF (Troika). An article in the Wall Street Journal quoted two IMF officials as saying these measures were enough to win over support, and they should get its next tranche of aid helping boost sentiment. An article in the Financial Times late in US trade suggested the Chinese were in talks with the Italians about buying Italian debt and investing in certain companies. This caused renewed buying in EUR/USD just when it seemed like traders were looking to fade the pair. China has around $3.3 trillion of forex reserves and it is in their interest to see Europe do well as it is their biggest trading partner, with around 30% of its exports going there. Tonight, the Italians auction around seven trillion euros of five-, seven- and ten-year bonds and hopefully this story will see the auction well bid. Keep an eye on Italian yields tonight; good buying could see EUR/USD well supported. The pair is clearly oversold so a move higher could well be on the cards in the short term, however we feel traders will look to sell around 1.3720 to 1.38.

AUDUSD

AUD/USD continues to struggle to find much upward momentum in a market that is still clearly nervous. The Aussie remains the proxy of risk appetite, despite calls from some that it could obtain the mantra as the new safe haven, given its robust banking system, inflation concerns and decent yield. With the pair breaking the August 19 low of 1.0319, it exposed 1.0248 (61.8% retracement rally from 0.9928 to 1.0764) and AUD/USD traded eight pips shy of this level overnight before finding good buying support. From the overnight low, the pair followed the price action of EUR/USD, pushing to 1.0345 before a sharp deterioration in Australian business confidence and conditions saw a mild pullback to 1.0337. Barclays Capital wrote an interesting note this morning, suggesting they see the AUD outperforming other risk currencies over the next six months. However, on the other side of the ledger, UBS cut its AUD/USD forecast for the pair to 1.00 in the next month. Given the risks that are clearly evident, we would advocate UBS’s call, whilst a more profitability strategy is selling any rallies, with 1.0410 looking like a good place to start.

GBPUSD

The sharp ’risk-off‘ trade in Asian, European and early US trade saw the euro sold off and equity markets hit hard, which in turn dragged sterling along for the ride before a late rally on Wall Street saw significant reversals. Sterling eventually closed the session modestly higher at 1.5859, after trading as low as 1.5771. The late rally was sparked by reports in the Financial Times, suggesting the Chinese were in discussions with Italy over the purchases of its bonds. From a technical perspective, there was a lot of buying interest coming in around the major low of 1.5777 formed 12 July. Given cable has been hit so hard recently, traders are likely to be positioned on the short side, meaning the pair could be vulnerable to a sharp short-covering rally should the market start to move higher. The trigger for us would a break above yesterday’s high at 1.5884. Looking ahead, there is a bit in the way of economic data due out this evening including CPI, RPI, and trade balance at 6.30pm (Melbourne time), followed by a speech MPC Member Posen at 9pm (Melbourne time).

ENDS

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