Plans to boost EFSF lift risk appetite
The euro started the week sharply lower, wiping out all of last Friday’s slight recovery, and dropping to an eight-month low versus the dollar early on Monday. The single currency appeared to be extending its decline, continuing where it had left off Thursday of last week, on increasing risk aversion in global financial markets.
Risk appetite was weighed by the announcement of “Operation Twist” by the Federal Reserve last week following their FOMC meeting. Investors were clearly positioned for a more aggressive move by the US central bank and sold-off on riskier assets after the announcement. The Fed announced an intention to purchase $400 billion of long-term debt, which is to be funded by selling the same amount of short-term paper, by the end of June 2012. Sentiment was dampened further by the fact that the FOMC vote was not unanimous, highlighting division within the Fed. The language used in the statement also left the door open to further policy action, which left a lot of uncertainty among traders.
The dollar found support as forex investors sought it’s ‘safety’ given heightened risk aversion in global markets. The situation in Greece seemed to worsen at the end of last week, with speculation about a possible default increasing. Global equity markets were under pressure, weighed by concern over the banking sector’s exposure to Greece’s debt.
Over the weekend, IMF/World Bank meetings in Washington offered little clarity on measures to tackle lingering debt woes. Investors perceived a lack of initiative to finding a lasting solution to the euro zone debt crisis. The IMF communiqué pointed out that the global economy has entered “a dangerous phase, calling for exceptional vigilance” but did not offer any guidelines to tackle the problems.
Dollar at 8-month high versus euro
EUR/USD plummeted lower early on Monday, extending its decline to 1.3363, an eight-month low. The pair ran into support by 1.3361 represented by the 76.4% Fibonacci retracement of the move from 1.2874 to 1.4940, 2011’s low to high. A break below this level should expose the pair to further declines and test this year’s low.
The single currency managed to garner some reprieve by the US session on Monday, amid reports of a plan being devised to boost the firepower of the European Financial Stability Fund. The euro continued its rebound on Tuesday extending its gains versus the dollar despite comments by Spain’s economy minister who dismissed rumours of an extension of the EFSF to €2 trillion, saying it was not on the table. Risk appetite improved on Monday and Tuesday, leading global equity markets higher and pushing demand for risk assets. Renewed optimism came about on hopes of a rescue package for the euro zone debt crisis which mainly involves leveraging up the EFSF.
Yen gains capped by intervention fears
The Japanese yen experienced a similar fate to the US dollar over the past few days. It was also supported at the back end of last week as forex investors sought ‘safety’ and extended its gains earlier in the week, only to pare some of its gains later on Monday and Tuesday. EUR/JPY appeared to be in free fall at the start of the week, plunging to a decade low of 101.94, but bounced back up to 104.32 at the time of writing.
The yen continued to be supported against the greenback as it is still the preferred ‘safe-haven’ currency especially since the SNB set a floor on the EUR/CHF at 1.2000, which effectively ended, for the time being, safe-haven flows towards the Swissie. USD/JPY continued to hover close to its all-time low at 75.95 hit in August of this year. However forex investors are wary about pushing the yen higher on concerns that Japan may intervene again in FX markets to stem its strength. The yen is up almost 6 percent versus the greenback so far this year, 4.50 percent versus the euro and more than 8 percent against the Aussie.
Sterling off its yearly lows
The pound also recovered some of its losses so far this week after slipping to a one-year low against the greenback last week. Sterling remains bearish however, as speculation of further quantitative easing by the Bank of England is weighing on the British currency. GBP/USD rose to 1.5675 on Tuesday, from its lows last week at 1.5328 after minutes from the latest BoE policy meeting showed that monetary policy officials are ready to ease policy further.
Gold dived lower on Monday
Metals have come under severe pressure at the start of the week, with spot gold (XAU/USD) falling more than $120 an ounce in a few hours as investors sought out the liquidity of the dollar. Gold fell to $1’533.40, it’s lowest since mid-July. XAU/USD is down more than 9.50 percent so far this month. Silver (XAG/USD) also tumbled lower, down more than 21 percent this month, weighed by a more expensive dollar. Furthermore, RTFX Trend recorded a 16.69% gain by Monday’s closing on XAG/USD. The trend turned bearish from the 22nd September at a start rate of $35.87 and closed at $30.74 on Monday.
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