The market is tagging along in its wait and see mode. The big news is just about to come. The market is pretty sure that a heated debate will take place at the boardrooms of the FOMC, the ECB and the BoE this week. How long should one wait to take back some of the extreme measures and in which way and timing should the message be given to the markets?
The fear of a double-dip recession is very real and despite some good signs and some good news the underlying leverage has not been removed. However, the dollar is becoming more resilient as the year ends. Investors are turning risk-averse, buoying the safe-haven greenback along with the Japanese yen and Swiss franc against the euro, sterling and commodity currencies.
The stock markets will probably remain choppy as investors will book profits during Q4. This should hinder equities in the near term, enabling the dollar to gain further. Further risk aversion should push the euro against the dollar back to 1.4320 before the end of the year.
The major world economies of the G20 will gather in Scotland this weekend to discuss foreign exchange and the dangers associated with declaring that some banks are too important to let them down. There will also be discussions on the downward pressures affecting the dollar and the relative inflexibility of certain Asian currencies. The Europeans always complain that the rise of the euro against the dollar is hurting exports.
Sterling is again under pressure after news that Britain's two largest retail lenders, Royal Bank of Scotland and Lloyds Banking Group, have agreed to a massive shake-up of the banking sector that will see both sell hundreds of branches and key businesses to appease EU concerns over state aid and competition. The move leaves RBS, which is 70 per cent state-owned, as the only bank joining the government's Asset Protection Scheme.
Both banks were also hit by disposal orders to meet EU state aid rules, with RBS forced to sell chunks of its retail bank, RBS Insurance and to shrink its investment banking reach. This should put further pressure on the UK's sovereign rating and support short sterling against the euro.
On Tuesday, the Royal Bank of Australia raised the cash rate by 25bp to 3.5 per cent. The accompanying statement repeated RBA's intention to "gradually" lessen the monetary stimulus it has provided since the onset of the financial crisis, but no further guidance on the timing of future hikes was given. What is interesting is that the statement also referred to a "rise in the exchange rate" noting that it would act to "dampen price pressures".
The RBA has until now avoided references to AUD strength, despite the eagerness of other G10 central banks to express opinions on their own currencies. The next opportunity to do so will be a speech by RBA Governor Glenn Stevens today, to be followed by the release of the RBA quarterly monetary policy statement tomorrow. Even though the Australian economy is in 17th place worldwide, it is seen as an "economy test" in recovery. It is the first G20 country to have raised its rates since the beginning of the economic crisis.
Upcoming FX Key events
The market will be paying very close attention to the various policy announcements this week from the Fed, ECB and BoE. The market expects the Fed to keep rates unchanged and to maintain its statement on keeping rates low for an "extended" period.
The BoE is expected to increase QE by £50 billion and the ECB will likely hold off making any changes to its non-standard operations.
The US data highlight will be the non-farm payrolls to be released tomorrow. G20 are meeting this weekend.
FX Technical Key points
EUR/USD is bearish, target 1.4320, key reversal point 1.5150
USD/JPY is bearish, target 85, key reversal point 92.50
GBP/USD is bearish, target 1.5050, key reversal point 1.6850
USD/CHF is bullish, target 1.0650, key reversal point 1.0000
AUD/USD is neutral, watch 0.8850 and 0.9500
NZDUSD is neutral, watch 0.7300 and 0.7725.
Mr Longchamp is head of trading at RTFX Ltd.
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