Here we go again

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Data/Event Risks

  • EUR: Focus will remain on Italy and just how the parties try to form a government (which currently looks difficult) or whether another election looks likely. Key support comes in at 1.2998 on EURUSD.
  • USD: The average range on Fed Chairman semi-annual testimony days (0.90%) is only modestly higher than normal on the dollar index (0.80%). But the dollar index has been relatively steady in recent months, given that the “currency wars” have been playing out mainly on other currencies such as the yen, sterling and euro.  Note that dollar has risen on 4 of the past 12 semi-annual testimony days, with 3 of these occasions in the past 2.5 years.

Idea of the Day

Yesterday proved that the past 14 months have been one long holiday in the drama that is Italian politics and for the single currency, it was a strong wake-up call, trading a near 3 cent range on the day. Gaining 55% of the popular vote were a former comedian (Grillo) and the serial prime minister (Berlusconi) currently fighting tax fraud and sex charges.  The difficulty is knowing to what degree this is a fight-back against the reform and austerity being imposed on Italy, or just a return to business as usual in Italian politics. You have to remember there have been more than sixty elections since 1945, so not far off 1 a year.  What it does mean is that the single currency is moving from being the currency war loser (gaining from weakness in other currencies) to once again being caught up in the euro crisis.  Further elections look likely, along with more volatility on the euro.

Latest FX News

  • EUR:  Pretty much a one-way street north for EURUSD through to the announcement of the Italian election exit polls, then it was down the elevator shaft as the early indications were undermined. Next key support for EURUSD is at 1.2998.
  • JPY:  Trading like the safe haven it used to be on Monday, gaining nearly 3% vs. the USD since the Italian election results started seeping through.  USDJPY remains in the broad uptrend, but has broken decisively lower, killing the more consolidative tone seen through most of February.  Yen bears have once again been burnt.
  • GBP:  The main focus was the ramifications from Friday’s downgrade from AAA status by Moody’s.  Within this, the debate is how much of a short-squeeze can take place before the wider downtrend resumes.  Previous history suggests this could be a few big figures after a sell-off of this magnitude (over the past 2 months), but the fundamental backdrop appears decidedly bearish.
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