Fx Views 23 may 2011

EUR Greece downgraded by Fitch to B+ amidst growing concerns they won't be willing to meet the likely stringent austerity measures that might accompany any more rescue money from the Eurozone or other aid organization. Now the question is which model do they take without making it a more expensive precedent for the other PiGS countries in case they too come knocking. Risk is off the table but the momentum so far is not that fast. The pace will depend on the solution tha will come out of the Eurozone block. Still have to see 1.40 giving way as investors liquidate more. AUD Any risk-off situation is likely to also affect AUD with the huge carry trades positions put through AUD. 1.05 being tested today and might see it fall to test 1.0250 or fleet with Parity again? With a hike possibly in H2, dips, deep enough could offer some attraction to re establish longer term longs for yield. JPY Boring. 80 supported on back of weak Japanese fundamentals after the twinn tragedies but weak US data and continued QE2 action keeps USD soft. Perhaps 80-82? GBP Looks weak though the threat of inflation and switching out fro EUR supports some. 1.60 might go if EUR collapses.

FX views

EURUSD European finance ministers have a big task ahead when they meet. Greece is tittering on being fully bankrupt. They need another Eur60 Billion to tie them over for 2012 & 2013. A few scenarios can pan out: 1) EFSF supports the full EUR 60 billion. This would be the best outcome and EUR should recover from here. 2) European government sled the Eur60billion and take a "haircut loss" sparing private lenders. EUR likely to fall then recover. 3) European governments lend full/part and both European agencies and private lenders, many are European banks take a "hair cut" loss. This is the worse scenario. EUR should fall quickly past 1.30. AudUsd Risk off climate caused AUD to briefly touch 1.10 to fall to support at 1.0550 today. Softer commodities, oil, gold prices taking it's toll. Market is long. I would sell rallies to 1.07 area. EUR will lead still. UsdJpy US still looking weak and keeps a lid on UsdJpy which is sitting just above 80. A slow drift south unlikely to trigger intervention but I would ink nit too far below or else BoJ likely to again seek international help to intervene. Still trading in a wide range 80-85.

Fx Views this week

EURUSD Wow, the market loving risk still. Despite a scare on Euro debt last Monday, EURUSD continues to make strides to possibly test 1.47-1.48. Any dips(shallow at best) were bought up and triggered several option barriers. Also talk in the markets of Asian central banks re-balancing their portfolios and some buying Euro sovereign bonds (China) keeps this pair bid, bid and more bid. With the news of S&P putting US on credit rating watch further fueled the move upwards. Bottom line- not enough bad news to derail the bid undertone but care that any event driven news could cause a quick deflation of positions as markets are generally long up to their eye balls. AUDUSD Same story here with domestic inflation possibly ticking up a notch after the floods in Queensland. Follows EUr and Risk play. Positive equity markets also aiding to keep a base under AUD. With a hike likely in H2 this is likely to keep investors happy with the already high yields. Buy on dips down to 1.0250 if we can see a pull back. USDJPY I've been calling 80-85 range and at one stage was in serious fear that the range could break out. But alas it's back well into the range and heading south sitting just atop 82. Below here is intervention territory so don't get too carried away. bOJ meeting this week and all eyes pinned on whether they are going to pump another massive dose of liquidity which will probably mean more carry trad opportunity but again care on intervention. Play the range otherwise. GBPUSD You can see it more clearly in the crosses the weakness of GBP as it's GDP numbers continue to show signs of weakness. Not bullish on this one so prefer to short GBPAUD. USDCAD Oil. Still bid on international markets amid still unresolved Libyan tensions. Market doesn't want to take this too low though still bearish. Small bounce below 96 but reckon look to re-establish shorts closer to 98. Good luck.

FX Views
EURUSD
Continued talk of higher rates for Europe keeps EUR bid after the intervention calmed investors fears of a financial melt down.
Major central banks intervened to sell JPY to the tune of 2 trillion by just the BoJ alone.
With this fear taken out, looks like risk is back on e table hence we see USDJPY, EURUSD and AUDUSD back where we started early last week.
EUR may probably see a test of 1.43 or higher if this continues.
AUDUSD
Should benefit from the improved risk appetite and a tech at 1,0150 cannot be ruled out this week or possibly 1.0250 even.
USDJPY
Look at the liquidity injection from intervention and the promise to pump more liquidity into the Japanese money markets as a Quantitative Easing for Japan and it should drag JPY lower just as it did the ISD since Aug 2010. Possibly see USDJPY test 83 or even higher in the coming weeks.

EURUSD
Expectations of higher EUR rates keeping EUR bid despite the downgrading of Spain's rating.
EU summit was nonevent as expected as it does take quite a lot to get the rescue mechanism into place given that any agreement needs to be reformed into the Treaty.
Looks likely EurUsd to try 1.40 again this week. Medium term I am looking to reduce longs from here still. The sovereign debt issue has not gone away.

AUDUSD
Positively correlating to the EUR, AUD looks bid but efforts to attempt at 1.0250 is not convincing. Australia relies >10% of trade with Japan. This will take some off terms of trade for Australia. So I am getting a little nervous the longer AUDUSD doesn't clear 1.0250.
Then again if you are Asian based, your countries are also likely to be affected. So on balance probably not much movement there.
I am looking to reduce my longs over the next couple of weeks unless the clear break of 1.0250 is convincing.

USDJPY
Market started off buying JPY on Friday but quickly reversed. Boj pumping lots of liquidity to shore up the economy to keep it going. Japanese sovereign debt is likely to grow past it's current 200% and in the long term doesn't make it look awfully attractive.
I am looking to probably buy on dips to 81 area.

FX views

Setting the scene Greece got their debt risk rating cut down by 3 notches by Moody"s. ECB still talking about higher European rates. Oil is shooting up once again. People are buying EUR as the FED carries out their QE2 spending even when non farm payrolls improved and Unemployment is improving to below 9%. This is probably still working in the EUR"s favor. But for how long? I can't think this can last for too long but EUR looks still bid. Some trader friends told me people are talking about flight to safety into EUR and GBP . I can buy that if you take all the rich people in the middle east. If is is so, EUR and GBP could remain well bid for some time now. AUDUSD Firm on the back of continued talk by Stevens of a prolonged resources boom. China is still looking to achieve 7% per anion for the next 5 years! Ok, this was shaved a little from about 8%. so we ask ourselves how much can the US or Europe grow? I am not particularly convinced AUD can sustain a big rush past 1.0250 even thought we are trading firmly on the high side of 1.01 today. I am still looking to reduce some longs, just in case. Watching EurAud and seeing if it can make a double top. USDJPY Bid. High oil normally means weak Yen. See it trading toward 83+ GbpUsd Still on interest rates expectations. And on the back of rumored safe haven buying from wealthy from Mid east, this could stay bait firm. But care as the buying could easily fissile out on the back of weak economic data. Don't lose sight of this. NZD Still weak after earthquake. We are sitting at 73 cents. No reason to be bullish here except to reduce longs. I think many Asian clients must be caught on way down through Dual Currency Investments. I would look to rallies to get out as economically NZ looks vulnerable.

FX Views

EURUSD Continued talk about raising Euro rates keeps the currency bid. EU Summit starts on March 11to discuss how to make the EFSF a permanent feature and how to extend the loans to Greece. Ireland has a new government (would you blame them?) and off the post remarks talk tough about their loans from the ECB being too stringent. Rhetoric and posturing I think. US data turning better and there is talk FED starting to scale back or slow down QE2 operations. US equities made good gains of up to 1.6% on Friday giving some support to the dollar but not much. Discussions at the EU Summit won't be smooth one would suspect as Chancellor Merkel will be facing domestic pressure inttryi g to be benevolent leader to peripheral Euorpean states. I think EUR might see some difficult times ahead. Longs should look at getting out . 1.3570 to watch for a break down to 1.30. AUDUSD China thought to have bought AUD on the back of commodities purchases and investors switching from NZD after the devastating earthquake. AUDNZD should remain bid and possibly test 1.36. AUDUSD itself is bid up to high 1.01 today and it could again attempt the crucial 1.0250 this week or I fear it may retrace. Thinking of using DCI to reduce my longs now. Very short tenor. Break of 1.0250 bodes very well for AUD but I would like to see the reasons for the run up before being too bullish at this level. Asian investors need to be wary of the perceived expectations that their own central banks may want to see their own currencies appreciate agains the dollar, limiting the upside of this long AUD/Asians. AUDSGD still sees 1.31 as formidable resistance. GBPUSD Q4 GDP revised downwards to -0.6% but more hawkish comments makes it look imminent that BOE will like raise rates soon. UK need to be careful with their high inflation low growth (negative) and all signs point to a deflationary situation. I would sell GBOUSd as I mentioned last week just below 1.63 for 1.54 objective. USDCAD On way to 96. What more can we add with oil price presides supporting the Looney.