- FX View: The USD may remain relatively strong amid woes about contagion in EMU periphery, and probably further helped by better US data next week.
- EUR: Irish woes, rising bond spreads and discussions about the size of the EFSF and a permanent crisis resolution mechanism keep EUR-USD biased to the downside. Only expectations on the ECB exit strategy can help now.
- GBP: With both EMU and the UK involved in the Irish bailout, EUR-GBP should remain trapped close to current levels.
The market continues to be mainly characterized by swings due to the Irish crisis, and the final size and the conditions attached to the financial aid package. Equities held the line this week, but the uncertainty stemming from contagion fears in the EMU periphery and the nervousness about a potential escalation of the Korean crisis again helped the USD and the CHF to outperform other currencies, amid a series of mixed US economic indicators. These factors should continue to accompany currency investors during the next few weeks, with worries about further Chinese monetary tightening looming, too. Key US data may further help the USD next week.
November non-farm payrolls should have expanded roughly at the same pace as in October, November consumer confidence might improve and the ISM manufacturing and non-manufacturing surveys are both expected to stabilize at current levels. Overall, the economic picture may further help the USD against the euro, the yen and sterling, while the commodities and the Nordic currencies may strengthen against the greenback if equities regain more momentum.
EU leaders’ discord weighs on the EUR
The EUR came again under pressure as Ireland finally applied for financial aid from the European Financial Stability Facility (EFSF). Although the Irish government presented a four-year plan, which should put Irish competitiveness back on track and thus allow Ireland to grow its way out of the debt crisis, the current instability in the Irish political landscape, with the government pointing to the possibility of general elections already as early as January, has unnerved investors. Further increases in EMU periphery spreads this week are spooking investors at a time when Germany is pressing ahead with its permanent crisis-resolution mechanism proposal, including private sector participation for eurozone countries which are on financial life support, following a decade in which single member governments’ have failed to do their homework regarding structural reforms.
Speculation is now running high that the EUR 750bn package to save the euro, which consists of EUR 440bn from EFSF, EUR 60bn from the European Financial Stability Mechanism (EFSM) and a 50% top-up of the European funds by the IMF might not be enough to save the euro if spreads should further blow out from current levels. While the EFSF’s AAA rating underpins its credibility, unfortunately it reduces its effective credible firepower during times of heightened financial stress to the funds provided by contributing nations which really live up to an AAA credit standard. These funds, however, amount to only roughly EUR 240bn, and, therefore, reduce the total package, including the EFSM and IMF contributions, to just EUR 450bn.
This amount would, most likely, not prove enough to stabilize the euro in case both Portugal and Spain should require outside assistance. Although we consider it unlikely that both Portugal and Spain will be forced to seek financial aid, the current EUR weakness and this week’s renewed spread widening show that for the market as a whole, trouble in Portugal and Spain presents more than just a tail scenario. Therefore, heading into the last month of the year, we think that EUR-USD will remain rather weak. Currently, market positioning is pointing to a fall towards 1.31, where the pair’s 200-day moving average lies. At the moment, there are few potential EUR positive factors that could trigger a return above the 1.3550 resistance level in the near term.
Next week’s ECB meeting could at least help EUR-USD to stabilize close to current levels, in case the ECB underlines that it is set to press ahead with its exit strategy, notwithstanding the EMU funding troubles. Macroeconomic data, mainly from Germany, should play only second fiddle, as did this week’s very comforting increase in the eurozone PMIs and the Ifo index, which both failed to lift the single currency.
BoE largely dispels fears about QE2
Concerning economic developments, the second GDP estimate confirmed 3Q UK GDP at 0.8% qoq and 2.8% yoy. At yesterday’s HM Treasury Select Committee, the BoE Governor Mervyn King underlined again the importance of sticking to the UK 2% inflation target and the necessity of starting to raise rates gradually at some point, implicitly suggesting that the current target of the Asset Purchase Facility (APF) will remain unchanged. The testimony should prove neutral for the pound, as should the macroeconomic data published in the UK next week. While the manufacturing and services PMIs should still display a healthy degree of economic activity, house prices may continue to trend downwards. EUR-GBP has been on a modest downward trend for some time, but support in the 0.84-0.85 band should prove quite strong. Heading towards year-end, we don’t see EUR-GBP moving far from its 0.85 pivot, as the current main market driver, the Irish saga, is having an influence on both sterling and euro, given that the UK financial sector has as well considerable Irish exposure. A relatively stable EUR-GBP currently seems to limit cable‘s hopes for a
return above the 1.60 mark. While the support at 1.5750 proved rather strong, risk aversion and USD strength currently prevent a return to 1.60, but in the medium term the greenback should loosen its grip and dips below 1.5650 in GBP-USD could offer value for a return to 1.60.
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Full report: Forex Outlook : USD to remain in the driver’s seat
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