Euro Struggles with Uncertainty

12/21/2010 12:01 am EST

Focus: FOREX

Normally this week is generally not the season for decisive currency moves, but the raging uncertainty about the euro zone has euro crosses heavily offered. Risk, meanwhile, is nevertheless brushing off EU woes and Korean tensions ahead of the US session. What next?

UK Confidence

Recall the UK nationwide confidence number for November (released last week) saw a huge drop that may have helped push GBP sharply lower for a time. Another confidence survey is out tonight— the GfK survey—a survey that has a far longer history than the nationwide survey and has actually tended to lead it in the past. Over the last several days, EUR/GBP has twice failed to close above the 200-day moving average, and if this survey fails to dip, GBP could get a bit of a boost off of that development.

In general, though, the brave British must be dreading the New Year and the onslaught of new austerity measures, a dread that has likely created the odd combination of super-strong retail sales (one last holiday shopping spree while the VAT is lower) with plunging consumer confidence. It will be very interesting to see how the demand side of the economy responds as the January numbers start to roll in next month, and let's see if the GfK number confirms the ugly nationwide reading. The BoE minutes will be out on Wednesday and also critical for GBP direction in the short term.

Chart: EUR/GBP

EUR/GBP has twice tried to rally above the 200-day moving average and failed, so this remains the key resistance. The pair is likely to make a directional commitment soon.

Click to Enlarge

Renewed Euro Bashing

After the very weak attempts by EU/ECB officialdom last week to get ahead of the mounting sovereign debt problem, the euro is under renewed pressure today as a Bloomberg article points out that it is more expensive to insure the debt of France than that of the Czech Republic or Chile and that the implied rating of CDS on sovereign French debt are seven steps below AAA. The situation in government-less Belgium is still highly tenuous, though it had virtually the same CDS price as Italy yesterday (and France's CDS price is half of those two countries and less than a third of Spain's). The pressure on EUR crosses remains intense: EUR/CHF has touched a new all-time low, EUR/SEK is having a try below the 9.0 level (and interest rate spreads suggest it could have much further to go), and EUR/NOK is on the offer as well, close to the lowest levels since May.

It's a touchy time of year with thin liquidity conditions, but the fundamental story is very pressing at the moment, so until the EU officialdom comes up with a more forceful response to what is going on, it could be touch and go for the euro. Interestingly, despite the fiscal profligacy of the recent Obama/Republican tax deal, the German CDS price (around 55 currently) crossed sharply above the US CDS price in late November and hasn't really looked back. With German rates on the move as well, the PIGS spreads to Germany become less meaningful since Germany is beginning to get dragged down in the mud by the uncertainty at the periphery, and we may need to look more closely at CDS spreads using US debt as a benchmark.

Looking Ahead

Each day of the week should mean thinner and thinner liquidity before we get a bit of a bump next week and then a massive return to more normal trading conditions on Monday, January 3. With risk assets pushing higher and higher in the US and showing more and more divergence with the rest of the world, we are very anxiously awaiting the first couple of weeks of trading in the New Year to see how the divergences resolve.

In the more immediate future, watch for the Royal Bank of Australia (RBA) meeting minutes tonight. It will be interesting to see the degree to which the currency's strength was discussed at the meeting. AUD has had quite a run higher today.

Also in Asia we have the Bank of Japan (BoJ) monetary policy decision as we watch for the next easing step from the bank and for direction in interest rates after the US ten-year yield recently crossed above 3.00/3.25% and is now falling back down to that area.

Today we have the Canadian November CPI and October retail sales report.

By the Staff at Saxo Bank
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