EUR: Failed Intervention?

June - 7 - 2010 Author: Christine Allen Respond

It has been a topsy-turvy day in the foreign exchange market, particularly for currency pairs involving the euro. There has been a lot speculation of intervention as the EUR/USD rallied 100 pips in less than 30 minutes. However the currency pair gave up its gains just as quickly as it accumulated them, leading some traders to wonder if intervention was really the cause. Within 90 minutes, the EUR/USD gave up all of earlier gains which tell us that despite attempts to bolster the currency pair, the desire to sell euros is too strong. Secondly, if a central bank was behind the run-up in the euro, they have failed miserably.

SNB Intervenes in May

Although it may be tempting to credit the jump in the EUR/USD to ECB intervention or a large transaction by a major player, the price action in EUR/CHF reflects intervention by the Swiss National Bank. EUR/CHF jumped 160 pips in 1 minute and a move of this magnitude is difficult to be engineered by anyone other than a central bank. The move in the EUR/USD was far more gradual, occurring within a 30 minute and not 60 second time span. Over the past year and a half, the SNB has been silent but deadly. They have not verified any bouts of intervention but according to the latest data from the Swiss Federal Statistics Office, SNB currency reserves rose to CHF232.4 billion by the end of May from CHF153.6 billion in April, which is a sign that they have continued to sell Swiss Francs and buy foreign currencies to keep the currency in check. SNB President Hildebrand has pledged to act in a “decisive matter if needed” and it appears that he is keeping to his word. EUR/CHF fell to a record low before the SNB intervened. The SNB is not deterred by the fact that intervention is rarely successful. Although they were able to keep EUR/CHF contained within a tight trading range for most of 2009, they lost control of the currency when the sovereign debt crisis in Europe exacerbated. Investors from across the globe poured into the safety of Swiss Francs, sending it from 1.48 down to 1.3770 in a matter of months. Swiss intervention has become virtually as ineffective as Japanese intervention in the early 2000s and if the SNB wants to stand any chance of countering market pressures, they need to at minimum openly admit to intervention.

Traders Still Want More Action from European Policymakers

Meanwhile, the euro ended the NY trading session higher against the U.S. dollar. When the ECB released the details of their government bond purchase program, the euro received a boost and today, the currency rebounded after European Finance Ministers signed an act to officially establish a EUR440 billion rescue fund for Europe, which is a key component of the EU’s EUR 750 billion package. When the EU and IMF first announced their aid package, there were many unanswered questions and slowly one by one, those issues are being addressed. Yet the gains in the euro have been limited because investors still want more from European policymakers and details are not enough. There is no major economic data scheduled for release from the Eurozone tomorrow but the latest trade data suggests that the weak euro has not provided much support for Germany, the largest country within the Eurozone. Exports fell 5.9 percent, reducing the trade surplus from EUR16.9B to 13.4B. Although exports may recover after the steep slide in the euro in May, the drop in imports is concerning because it suggests that domestic demand is waning.

DOLLAR: A TINGE OF OPTIMISM FROM THE FED

Uncharacteristically positive comments from Fed Chairman Ben Bernanke helped to ease risk aversion and lift U.S. stocks. In turn investors moved out of the safety of U.S. dollars and into higher yielding and riskier currencies. Bernanke said overnight that “There seems to be a good bit of momentum in consumer spending and investment” and “My best guess is we’ll have continued recovery, but it won’t feel terrific.” For a central banker that has been consistently dovish, these words are extremely encouraging but especially when accompanied by similar comments from the Chicago Fed President. Evans believes that the U.S. economy is resilient enough and 3.5 percent GDP growth is a modest objective. Like Bernanke he thinks that consumer spending will grow modestly but it will not be the engine of growth for the world. He also clarified that the Fed will maintain an accommodative policy for sometime. These comments suggest that Friday’s retail sales report could be strong. Meanwhile small business confidence edged higher in May but economic confidence deteriorated in June. The fact that the Dow rose more than 100 points on the same day that gold prices hit a new record high indicates that investors are still very nervous about the global economic outlook. Some have credited the move to the weakness of the greenback but aside from today, the greenback has been strong. It is more likely that central banks and investors are diversifying out of euros and into gold. The Beige Book report is the only piece of U.S. economic data on the calendar tomorrow. The U.S. economy has had its ups and downs since the last monetary policy meeting and it will be interesting to see whether individual Fed districts are as concerned about the labor market as Bernanke.

GBP: CAUTIONARY COMMENTS FROM OFFICIALS

Although the British pound ended the day only slightly lower against the U.S. dollar, what was notable was the fact that the pound was the only major currency to lose value against the greenback. Critical comments from rating agency Fitch and Chancellor Osborne has weighed heavily on the currency. Most of the focus over the past few months has been on the Eurozone but the U.K. also faces significant fiscal troubles. With a budget deficit of more than 11 percent of GDP, it is one of the largest in the developed world. Fitch called their fiscal challenge “formidable” and said faster deficit reductions are needed. The rating agency retained a stable outlook on Britain’s AAA credit rating but their comments support the more aggressive spending cuts warned by the new government. Tighter fiscal policy will limit the recovery in the U.K. and lead the Bank of England to hold onto a dovish stance at their monetary policy on Thursday. U.K. Chancellor Osborne agrees that the level of the deficit “threatens recovery in the U.K. and said it will be a national challenge for Britons to live within means. The trade deficit is due for release tomorrow and unlike the Eurozone, we believe that the weakness of the pound has lent support to the U.K. economy. According to the manufacturing PMI report, new orders rose for the 11 th consecutive month while export orders hit record levels.

NZD: WILL RBNZ RAISE RATES?

The Australian, New Zealand and Canadian dollars staged strong rallies against the greenback thanks to the rise in commodity prices and the rally in equities. Both gold and oil prices edged higher with the value of the yellow metal hitting a record high. Economic data from the commodity producing countries were weak. According to the Manpower survey, companies in Australia and New Zealand are expected to expand their workforce at a slower pace in the third quarter. These results are in line with the deterioration in business confidence reported in Australia. Housing starts in Canada fell short of expectations last month and could be vulnerable to a further slowdown after the recent rate hike. Australian consumer confidence and housing market data are scheduled for release this evening and the odds are skewed towards slightly weaker numbers. New Zealand has a monetary policy announcement on Wednesday afternoon which is Thursday morning in NZ. Economists expect the Reserve Bank to raise interest rates for the first time in 3 years from 2.5 to 2.75 percent. In our opinion, the decision is a closer call than most people realize because even though inflationary pressures have increased, so has the uncertainty in the global economy. Even if they raise rates, they will probably express the same concerns as the Bank of Canada who put future rate hikes dependent upon global uncertainties. Either way, the next 24 hours will be critical to the outlook for the kiwi.

JPY: KAN NOT BRINGING HOPE FOR YEN

The Japanese yen ended the NY trading session virtually unchanged against the dollar but lower against all of other major currencies. Prime Minister Kan-who took office today-leaves investors wary of Japan’s future. Kan’s backing for a weaker yen and his vow to “drastically rebuild Japan,” which will include closing the growing fiscal gap, forced many traders to continue selling the currency. Amidst the low swings, the yen seems to be headed for further depreciation as traders anxiously await upcoming economic data, including tomorrow’s GDP numbers. Japan’s Leading Indicators-a forecast of future economic conditions-decreased slightly to 101.6 from May’s 101.9, while falling short of the 102.8 forecast. Among the recent sell off, the Nikkei 225 experienced its first increase in three days after Bernanke’s positive remarks for U.S. markets-noting U.S. recovery to be moving at a “moderate” pace.

Such positive news is welcomed in light of the not so positive Economic Watchers Sentiment which revealed 47.7, falling short of the 50.8 forecast, and putting an end to five consecutive monthly gains. All this could be indicative that recovery in Japan may be slower than anticipated as consumer confidence dwindles and the Yen hinders overall growth. Machine tool orders are due for release this evening and the market expects a softer report.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be the currency pair in play over the next 24 hours. In the U.K, we expect Nationwide Consumer Confidence figures for the month of May at 7:01 ET or 23:01 GMT and Trade Balance figures at 8:30 ET or 12:30 GMT. The U.S. will be releasing April Wholesale Inventories at 11:00 ET or 14:00 GMT and the Fed’s Beige Book at 2:00 ET or 18:00 GMT.

GBP/USD remains within the Bollinger Band Range-Trading zone for the 9 th straight day with minor support at today’s session low of 1.4344, which coincides with the Lower One-Standard Deviation Bollinger band. The pair’s most significant support level is at the range low of 1.4230, which is also the pair’s One year low. The Upper One-Standard Deviation Bollinger band, at 1.4630, serves as resistance for the sterling dollar.

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