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FOREX: Euro Gains as EU Outlines Debt Crisis Fix, Yen Whipsaws in Asia

FOREX: Euro Gains as EU Outlines Debt Crisis Fix, Yen Whipsaws in Asia

2011-03-14 07:31:00
Ilya Spivak, Sr. Currency Strategist
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Overnight Headlines

  • Euro Rallies as Traders Respond to Progress on Debt Crisis Solution
  • Australian, NZ Dollars Plunge Amid Nikkei-Driven Risk Aversion
  • Yen Falls as BOJ Adds ¥12T to Liquidity, Doubles Asset-Buying Fund

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3788

1.4012

GBPUSD

1.5988

1.6108

The Euro rose as much as 0.6 percent against the US Dollar in overnight trade amid optimism following Friday’s EU summit outcome (see below). The British Pound declined, dropping as much as 0.2 percent. We remain short NZDUSD and have now entered short EURUSD.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:55

NZD

REINZ Housing Price Index (FEB)

3192.9

-

3119.8

21:55

NZD

REINZ Housing Price Index (MoM) (FEB)

2.3%

-

-2.6%

21:55

NZD

REINZ House Sales (YoY) (FEB)

-10.5%

-

-11.3%

2:09

CNY

Money Supply - M1 (YoY) (FEB)

14.3%

17.8%

13.6%

2:09

CNY

New Yuan Loans (FEB)

535.6B

600.0B

1040.0B

2:09

CNY

Money Supply - M0 (YoY) (FEB)

10.3%

16.8%

42.5%

2:09

CNY

Money Supply - M2 (YoY) (FEB)

15.7%

17.0%

17.2%

4:30

JPY

Industrial Production (MoM) (JAN F)

1.3%

-

2.4%

4:30

JPY

Industrial Production (YoY) (JAN F)

3.5%

-

4.7%

4:30

JPY

Capacity Utilization (MoM) (JAN F)

3.6%

-

3.0%

4:30

JPY

Consumer Confidence (FEB)

40.7

-

41.1

4:30

JPY

Consumer Confidence Households (FEB)

40.6

41.5

41.1

5:48

JPY

Bank of Japan Interest Rate Decision (MAR 15)

0.10%

0.10%

0.10%

The Australian and New Zealand Dollars underperformed as stocks plunged in Asian trade, sapping demand for the risk-linked currencies. The MSCI Asia Pacific regional benchmark index fell 3.1 percent, led by a 6.6 percent drop on the Nikkei amid fears of a large-scale nuclear disaster in the wake of the largest earthquake in Japan’s history. Besides potential casualties of as many as 10,000 (according to Bloomberg), the quake and subsequent tsunami damaged a nuclear power plant in Fukushima Daiichi – a mere 135 miles north of Tokyo – with one reactor suffering an explosion over the weekend and another today, stoking worries about a full-scale meltdown. The Aussie dropped as much as 1 percent while the Kiwi slid 0.8 percent against their major counterparts.

The Japanese Yen initially advanced, adding as much as 1.4 percent early in the session as the drop in shares stoked repatriation- and safety-linked flows into the currency. The move proved short-lived however, with prices snapping back in the opposite direction after the Bank of Japan said it will inject a record 12 trillion yen into the financial system to offset upward pressure on borrowing costs from rising risk premiums following the quake. Policymakers followed up by doubling their asset-buying fund to 10 trillion yen at the regular monthly policy meeting. The expanded program will include additional purchases of 500 billion yen in JGBs and 1 trillion yen in short-term government securities, to be completed by June 2012. Benchmark interest rates and the credit-loan program were held unchanged at 0.10 percent and 30 trillion yen, respectively.

The Euro rose against all of the majors, adding as much as 0.4 percent on average, as traders priced in the outcome of a preliminary meeting of EU officials on Friday that produced the outlines of the much-anticipated “grand bargain” on the debt crisis expected to be fully complete by the time policymakers meet on March 25. Most significantly, the sit-down produced agreement on allowing the European Financial Stability Facility (EFSF) to access its full capital base of 440 billion euro.

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

10:00

EUR

Euro-Zone Industrial Production wda (YoY) (JAN)

6.5%

8.8%

Low

10:00

EUR

Euro-Zone Industrial Production sa (MoM) (JAN)

0.3%

0.3%

Medium

With next to no economic data on tap in European and US hours, the focus remains on risk appetite, with positive cues from the EU summit competing for influence over broad-based sentiment with fears of a Chernobyl-style nuclear disaster looming in Japan. Stock index futures are broadly lower, hinting the bearish side of the argument is poised to win out, promising to boost the safety-linked US Dollarand Swiss Franc.

On balance, a bearish bias makes sense, with optimism from the EU sit-down is likely to be short-lived considering 440 billion euro is still woefully inadequate to shoulder the full burden of rescuing debt-strapped periphery countries. Furthermore, the plan opted to set “goals” rather than binding targets on budget rules for member states, which are frequently ignored (as had been the case for years with the Stability and Growth Pact). Finally, The EFSF was restricted to buying Eurozone countries’ bonds from primary (i.e. government) dealers only, meaning the fund won’t be able to directly manage select member states’ borrowing costs in the open market.

Looking ahead, this is likely weigh both on sentiment at large and the Euro individually. While the scheme remains a work in progress, its current form is hardly encouraging to jittery financial markets fearing the a sovereign default within the currency bloc could prove far more damaging than the collapse of Lehman Brothers for global credit flows. Meanwhile, the single currency will be weighed down considering the job of buying bonds in the secondary (i.e. open) market had been the job of the ECB, which bank President Jean-Claude Trichet had tried to pass off to the EFSF. That would have allowed the ECB to focus exclusively on inflation, making a rate hike in the near term relatively more likely than otherwise, but the current plan overtly opts not to transfer that power to the bailout fund.

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