Currency Contest

Post-Holiday Consolidation Provides Markets with Welcome Relief

Joel Kruger,

The markets will get back to fuller trade on Monday, with the US returning from the Thanksgiving holiday and set to digest this latest round of price action which has seen accelerated risk liquidation. While we continue to project broad based US Dollar strength, we would also not rule out the possibility for some more healthy corrective selling in the buck in the early week. Generally, it is not unusual to see profit taking and market retracements following the absence of a key session from the markets. Still, the key level to watch is the 1.3145 October low in EUR/USD, with a break of the level to officially negate the USD bearish price action seen in the month of October, and potentially open the next major downside extension into the 1.2000’s. Fresh offers are seen in the Euro into the 1.3450-1.3500 area.

Despite the price action today, headlines over the weekend have not been Euro and currency supportive, and while there was some relief buying seen on rumors of an IMF Eur600B loan to Italy, these rumors were later denied. An article in a German publication said that the EFSF would not be able to leverage up to EUR1T, while market participants also remained focused on the ever widening Italian and peripheral Eurozone bond spreads. Moody’s then came out and said that the rising severity of the Eurozone crisis threatened all EU sovereign debt ratings and that the probability for multiple defaults by Euro area countries was no longer negligible. Finally, news that ICAP was preparing its electronic trading systems for a potential exit by Greece from the Eurozone and a return to the Drachma, did not help matters. Outside of what can only be described as some profit taking and a potential short squeeze, the only other logical plausible explanation for the currency, equity and commodity strength were talk of SMP activity and news of a larger China investment into the IMF.

Looking ahead, the economic calendar for Monday is rather light, with mostly secondary data due. The only key release in North American trade comes in the form of US new home sales. Still, there are broader forces at play and we suspect that the larger global macro themes and developments will ultimately be what drive price action for the remainder of the day. US equity futures and commodities prices are extremely well bid as mentioned, but we continue to question the strength and will be looking to sell into these rallies.