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The Euro has been sold quite heavily since topping out by 1.3100 a few days back, but now seems to be having a hard time breaking back below 1.2600 and retesting the recent 1.2530, 2010 lows. Perhaps a better round of data including some solid German and Eurozone GDP figures, along with the talk of Spanish austerity measures, has helped to keep the single currency supported thus far on the day.
While most other major currencies have been tracking higher against the buck ahead of the North American open, both the Yen and Pound have been lagging. Understandably, the pick up in risk appetite can be attributed to the Yen weakness, but Sterling underperformance has all been due to local developments. Initially, the currency had been well bid following a healthy and better than expected unemployment data result, but a very dovish BOE inflation report, and equally downbeat comments from Governor King, proved too hard to ignore. The inflation report still saw risks to the downside, while King said that he was very concerned and that the banking crisis has now evolved into a “sovereign debt headache.” King also added that he would not rule out the possibility for additional asset purchases.
Elsewhere, Eur/Chf has seen an up-and-down session of trade with price action on the cross still quite volatile since the SNB pulled their bids at 1.4300. Bulls have been playing the long side on the back of some oversold technicals and hopes for additional central bank intervention, while bears continue to stick with the dominant trend and fail to be threatened by the currency intervention, targeting stops below 1.4000. SNB Hildebrand has come out in recent hours reaffirming that the central bank will not allow an excessive appreciation of the Franc.
Technically however, it now looks as though there is a lower top in Eur/Usd by 1.3100, which will be confirmed on the break below the current 1.2530, 2010 lows. Talk of hyperinflation, a round of currency devaluations, and another depression have all helped to keep most traders from aggressively buying currencies and despite today’s minor bounce, market participants seem to lack the necessary trust and reassurances needed to comfortably exit their long USD positions.
Interestingly, we have been seeing a breakdown in correlations between currencies and equities, with the currency markets continuing to warn of ongoing stresses and fears over the state of the global economy, as evidenced through the broad based USD bid tone. Meanwhile, global equities have been trading more optimistically over the past few sessions and seem to be interpreting things differently. In our experience, the currency markets are usually more on the ball and forward looking. Look for equities to come back under pressure on Wednesday, should we continue to see USD demand. It seems as though the marginally lower close in the DJIA on Tuesday, solid corporate earnings and surging metals prices (gold to yet another record high), have all helped to prop equities, but we are not convinced this will last.
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