Brave New World

Midday FX Update 19/02/2009

Fears about the future of eurozone economy and financial system have been tempered today by reports that the German government would back assistance to a troubled Euro-zone member states. This is in spite of an EU rule known as the “no bail-out” clause which prohibits collective liability for debt incurred by an EU member state. Western European banks are massively exposed to Eastern European debt. Eastern European countries have taken a huge hit from the loss of their chief engine for growth, exports. Risk appetite has picked up, with oil increasing and gold selling off. EURUSD rallied strongly in European morning trading from an overnight low of 1.2526 to over 1.27 by 1pm GMT. Also helping the Euro was release of the the German DIHK, which concluded that the weaker Euro was starting to be helpful for exports. Nevertheless its outlook for 2009 was “bleak”. GBPUSD also benefited from the more sanguine mood, rising in European morning trading from 1.4260 to 1.4420. This was despite data showing a large drop in tax receipts in January,  precipitating a sharp increase in the fiscal deficit. European equity markets were in positive territory for the first time in seven days. US data, which showed a smaller than expected decline in producer prices and much higher then expected initial (627k) and continuing (4987k) jobless claims, had surprisingly little effect on the foreign exchange market. The BOJ left rates unchanged at 0.1% as expected while the government has downgraded its assessment of the economy for the 5th straight month and describes the economy as being in a severe state. USDJPY continued its ascent, testing the key 94.50 level.

Overall, the market appears to be catching its breath from the sharp decline in sentiment over the last couple of days. The comment made by the German official about rescuing other countries, was just that- a comment, and an unattributable one at that. Conditions remain dire and the recent pause in the sell off in Euro currencies and the JPY is merely a result of profit-taking by dollar bulls. Technically, EURUSD and GBPUSD are reaching strong resistance levels, with may traders looking to re-enter a short trade in these currencies: EURUSD targeting 1.25, and GBPUSD targeting 1.40.  USDJPY is close to testing the key 94.50 level (it reach 94.44). A break higher would change fundamentally the landscape of the FX market- confirming the end of the strong JPY.