IG Markets Forex thoughts

IG Markets Forex thoughts

EURUSD

Overnight, EUR/USD was thrown around by speculation and rumour with the pair collapsing to 1.3837, before rebounding to an overnight high of 1.4062. This occurred around hearsay that the ECB was in the market buying Spanish and Italian bonds, in turn causing a huge short covering rally. Late in US trade, the euro took a fresh blow as Moody’s downgraded Ireland’s debt to Ba1, or junk status, citing concerns that there could be further pressure on the sovereign from a disorderly default. Asian traders however, looked through the downgrade, suggesting whilst it is undoubtedly negative, Ireland’s debt, with such elevated yields, is already trading at junk status. It seems traders are insinuating that the fears over Italy are perhaps overplayed, and the fact that the Italian press is reporting that the deadline for their budget vote will be Friday (previously July 17), many are suggesting the measure will pass smoothly is creating some positive sentiment towards the single currency. We feel Italy is in a much different space than Greece, Portugal and Ireland as they have a strong housing market and private sector debt, especially in households low by European standards. So in theory, the fears over bond yields spiking up to similar levels as periphery Europe is overdone should become attractive to certain bond funds around 6% (ten-year bonds). The dovish stance from the FOMC should also create some positive sentiment towards EUR/USD, so a move to 1.4050 cannot be ruled out.

USDJPY

USD/JPY came under significant selling pressure in late US trade pushing down to 78.50, the lowest level since March 17. This occurred before it rebounded back above 79.00 on speculation that the BoJ could intervene at any stage. The key catalyst behind the move was commentary from the FOMC minutes in which the Federal Reserve cited concerns over the debt ceiling, while also failing to show any cohesion on its views on domestic growth. Interestingly, and perhaps the part to which has put a bid under precious metals, was that some members felt that further stimulus may be warranted should conditions deteriorate further. We feel that the bar is still elevated and that inflation expectations, as measured by the bond market, are still well above where they were last August. We will need to see another couple of months of sustained deterioration in data, mixed with increasing fears of a sovereign default before Ben Bernanke commits to a renewed round of asset purchases. USD/JPY looks set for a short-term breather after its big move, but will be in focus tonight as Mr Bernanke is set to deliver his semi-annual testimony on policy.

AUDUSD

The AUD has shown some remarkable resilience over the last 24 hours, managing to ride the rolling waves of investor fears over the European debt crisis and who will be the next nation to experience sovereign debt problems. Having ended yesterday’s Australian trade around the 1.06 mark, the AUD slumped to a US session low of 1.0526, only to recover slightly to end back at 1.06. This occurred after the release of the Federal Reserve’s minutes gave the market the slightest whiff of further accommodative policies, should the US economy continue to stagnate. Upon reopening for Asian trade, the AUD moved in a relatively narrow band but climbed higher after the release of robust monthly economic data out of China eased investor concerns that the country’s growth was slowing too much. The pair currently sits around the 1.0619 mark.

GBPUSD

It was a hugely volatile session for sterling overnight, as it dropped too early to hit its five-and-a-half month low before recovering all of the lost ground to close modestly higher on the session. It fell to a session low of 1.5777 as UK CPI came in weaker-than-expected at 4.2% versus expectations of 4.5%; this saw any slim chance of a rate rise completely priced out of the market. On top of this, fears of European debt contagion were also weighing heavily on risk appetite. However, as the session developed, the market began to reverse following the US trade balance data. The upside really gathered momentum when the US dollar stepped off a cliff following the FOMC meeting minutes that suggested a QE3 package was a small possibility. Sterling closed the session at 1.5910; in Asian trade, it has continued to push higher, currently at 1.5910. Tonight, the market will continue to be focused on the European situation, as well as the latest claimant count change in the UK at 6.30pm (Melbourne time).

ENDS

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