Financial Advisor

FX Update: EUR – not much new on the table

EuroZone leaders are not bringing much to the table in their renewed efforts to get ahead of the sovereign debt crisis. Also, despite continued bullishness in US equities, risk appetite is crumbling around the edges in FX land.
EU Summit – much ado about not much
European leaders tried to come up with new measures to get ahead of the curve in dealing with the sovereign debt crisis at their summit of the last two days, but little of substance has been agreed on and we should all be relatively underwhelmed by their progress on the issue. There were attempts to establish some means of establishing a rescue package that extends beyond the 2013 expiry of the current EFSF vehicle as well as loosening up the rules on how funds are to be paid out of the current vehicle (running amounts rather than lump-sum packages like that designed for Ireland). The only clarity we seem to have after today is that we will have to wait another few weeks to see if the leaders can make a decision amenable to all factions even if there is an agreement in principle. Moody’s was out downgrading Ireland several notches today, adding to the other downgrades, threatened and otherwise, from earlier this week. A Globe and Mail called it “end of year house cleaning” on Moody’s part.

It is clear from this summit that Germany’s Chancellor Merkel remains dead set against expanding the current rescue fund or signing off on the creation of Euro-bonds. Peripheral PIGS debt spreads reacted little to the news and remain at elevated levels and EUR, after a brief squeeze higher today, quickly ran out of oxygen and fell back sharply lower.  It is becoming alarming how slow European’s leaders have been in crafting a response to the crisis – and while the consensus may be that market participants are unwilling to put on much risk at this time of year – the volatility potential here is perhaps higher than the market generally recognizes. EURUSD could see 500-700 pips of movement in the next few weeks if something more significant does not emerge from the EU/ECB leadership. Meanwhile, the German IFO has marched to a new all time high? Go figure.

Weak pound
The pound remains weak after the UK Financial Stability Report bemoaned the potential risks to British banks from the EuroZone debt crisis and the recommendation that banks try to limit the distribution of profits to shareholders and employees. A stunning drop in consumer confidence in November also pressured the currency as the market frets the implementation of the next round of austerity measures starting in the New Year.   Remarkably, according to this poll, confidence is at the lowest level in the UK since the darkest days of the financial crisis in early 2009. 1.5485 is the next important support level for GBPUSD and the 200-day moving average looms just below 1.5400.
Chart: AUDCAD
Bank of Montreal Bank announced today its intent to purchase Marshall and Ilsley, a US bank, for $4.1 billion in stock today. This may be some of the reason behind the strong uptick in USDCAD today in addition to general USD strength. It also gives traders a better entry level while considering whether an AUDCAD short is an idea for the new 2011. 


Looking ahead
The environment here across global market is very interesting. If we look at the likes of the Hang Seng Index, we have just broken down through a head and shoulders pattern. Meanwhile, emerging markets in general have rallied quite a bit, but are still well off the early November highs, while US equities are pushing the top of the envelope once more. Elsewhere, precious metals look nervous and bonds have rallied very sharply around the world while some of our risk measures have come off a bit. What does this all add up to? We’re certainly not sure just yet, but the divergences are noteworthy and suggest either that we simply have some end of the year profit taking on risk/commodity longs and thin liquidity making for random noise or that something more interesting Is afoot.  We’re always hoping for the latter, especially with complacency at such high levels.
Be on the lookout for volatility. Next week’s liquidity will be thinner than this weeks, so stay careful out there as always.

Economic Data Highlights
  • UK Nov. Nationwide Consumer Confidence fell to 45 vs. 52 expected and 52 in Oct.
  • Norway Dec. Unemployment Rate steady at 2.7% vs. 2.8% expected.
  • EuroZone Oct. Construction Output rose 0.0% MoM and fell-6.8% YoY vs. -7.7% YoY in Sep.
  • EuroZone Oct. Trade Balance out at 5.2B vs. 2.5B expected and 2.6B in Sep.
Upcoming Economic Calendar Highlights
  • US Nov. Leading Indicators (1500)
  • New Zealand Nov. Performance of Services Index (2130)
  • Japan BoJ Monetary Policy Meeting (0400)
  • Japan Nov. Nationwide Department Store Sales (0530)

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