Mike Paterson’s daily Forex brief

No sooner was my ink dry on Friday than we started to see a sell-off in the Euro as rumours of an imminent French downgrade persisted and lack of firm denials added to the inevitability. Add to that the frequently anticipated confirmation of the news that Greece is struggling to reschedule its debt forcing an unprecedented default and it’s not difficult to see why the positive attitude of the previous day melted in an instant.

France’s credit rating was cut by Standard and Poor’s to AA+ from AAA, while Italy saw its long-term rating drop by two notches, along with Spain, Portugal and Cyprus. Austria, Malta, Slovakia, and Slovenia also had their ratings lowered by one notch. Not only will this increase each country’s borrowing costs but also reduces the effective lending capacity of the EFSF (European Financial Stability Facility) bail-out from €440 billion to an estimated €293 billion, compounding the problem.

German Chancellor Merkel made it clear over the week-end that while she feels that the ratings move is a little unjustified she warned that it does have serious implications and the Eurozone needs to act firmly, but that it may take time (shock). As for French President Sarkozy, well, he’s dismissed it as overreaction obviously but he can kiss his re-election chances goodbye, and that in itself creates other issues for the ongoing Eurozone debt solution talks.

EURUSD made mincemeat of support levels at 1.2780 and eventually the previously key support at 1.2665 and we saw lows of 1.2627, not seen since the middle of 2010, before a rally of sorts to 1.2685. Overnight in Asia we have seen the lows hit again before a similar rally to 1.2683 and currently sits at 1.2670 as I type. Large barrier option buying protection at 1.2600 will be the next obstacle to further falls but once again, as I have been saying repeatedly for days, there are plenty of sellers in the rallies.

EURGBP fell rapidly too as the previous few days negative spotlight on the UK focussed once more on the Eurozone and we saw an equally fast descent over the day to 0.8280 (GBPEUR 1.2077). In Asia we’ve been as low as 0.8254 before a small rebound kicked in.

EURJPY also fell heavily but a lot of the Euro relative rebound in the past few hours has been attributed to defence of a major barrier option at 97.00 which has so far held but as in all the Euro rallies just highlighted the rebound is unconvincing.

The S&P downgrades have understandably angered many Eurozone politicians who feel that the UK is lucky to escape a downgrade but it may only be a matter of time, albeit we are not in such a bad position and, hey, it’s all relative. We’re being made to look good right now but the forecaster CEBR (Centre for Economics and Business Research) have released their latest report stating clearly that we are in double-dip recession (no real surprise there unless you’ve been under the duvet for the past year) and slashed growth forecasts for 2012 from 0.7% that it forecast in October to a 0.4 % fall. A still bigger fall of 1.1% looms if developments in the Eurozone take a sharp turn for the worse, the CEBR warned.

FX Update

FX Update

But for the moment the Pound overall is making a few gains as attention remains elsewhere but with the US $ generally favoured we saw GBPUSD fall below key support at 1.5270.This level is now attracting some good buying orders though and we’ve rallied in line with EURUSD back up to 1.5330 so far this morning.

Gold and equities remain in consolidative mode overall but the rallies are certainly tempered and the jury is out as to the impact that all the surrounding chaos and mayhem will have.

No data of note today but ECB President Draghi speak at 18.00 GMT. It’s a US holiday too but there’s a French debt auction straight off the blocks with the results announced around 14.00 GMT and they of course will be keenly awaited.

Is it a case of sell rumour/buy fact for the Euro after the ratings downgrades? It might have been had there been more solid/tangible debt solution plans in place but frankly it remains difficult for me to see how this house of cards cannot continue to tumble.

Unlike, (for the moment at least!) the mighty Shrimpers of Southend who resumed their place at the heady heights of League 2 with a fine 5-2 away win. Onwards and , hopefully, upwards!

Have a good week all.

Agree or disagree? Then please leave a comment in the box below or contact me by e-mail.

Mike ‘Oscar’ Paterson has been in the Forex trenches for nearly three decades working as a senior Spot trader in London at UBS, Chief Dealer FX at the State Bank of Victoria and in charge of Spot CHF at Credit Suisse with a daily turnover in excess of $1.5 billion. Mike now works as an independent consultant providing a fully bespoke service to the corporate and private sectors in physical FX delivery as well as guiding those who wish to improve their currency trading. Mike also presents seminars and workshops and writes for a number of publications.
To contact Mike please call +0044 (0) 1732 700383 or email mike.paterson@economicvoice.com
The views expressed above are those of the author and should not be taken as investment advice. MSP Foreign Exchange Services will have no liability for, or to, any persons executing trades based on the content above.

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