FX Markets: De-leveraging, Deflation, Deterioration, Deceased?

More Neil Staines, 3 hours ago15 December 2011

Higgs Boson and the EU treaty change detail… Both exist in theory!

The markets continue to be under-impressed with the Eurozone and its attempt at a plan. In fact the ‘risk-off’ bias of markets has seen equities, Eurozone peripheral bonds, and risk positive currencies such as the EUR and AUD begin to sell off at an increasing rate. This is partly driven by the declining liquidity as we move closer to the end of what, for many participants, has been a year to forget. Perhaps the most significant development over recent trading sessions however has been the move in Gold. Recent position squaring (this is likely a result of the fact that for some funds a long gold position will have been one of few winning trades on the year) driven perhaps by falling equities and risk assets in general has taken the shiny metal down in the region of $100 in 24 hours, confounding correlations and short-term market participants. 

Deleveraging and position exiting will continue to be a theme for ‘risk takers’ for the rest of the year and as liquidity begins to decline further markets are exposed to areas where there is a concentration of positioning. In this regard Gold continues to be vulnerable. The USD, despite the sizeable issues of the US will likely continue to benefit from the current positional unwinding and deleveraging in the short term, but GBP should continue to outperform the EUR. Perhaps another area to be concerned about as liquidity thins is EURCHF – and the critical 1.2000 level!

Averting deflation
The Swiss National Bank (SNB) left the ‘currency limit’ at 1.2000 per EUR at its monetary policy meeting this morning and kept the target for 3 month CHF libor at 0.00 percent as it battles with increasing deflationary pressure. The statement suggested that it is “ready to take further measures if needed” and it still seems likely that at some point next year (Q2 is the most likely timing in my mind, if the EU treaty change has been formalised and agreed – thus removing some of the safe haven pressure on the CHF to appreciate), provided there is not a marked turnaround in global price pressures, the SNB will raise the ‘peg’ and take EURCHF back above 1.3000. 

For the moment, however, with the SNB seemingly less worried about the negative consumer price index over the past two months, and the comment from SNB Head Hildebrand that he “does not see a sustained drop in the price level”, suggest no great urgency from the SNB to raise the ‘peg’, yet at least. 

No relief in 2012
ECB bond purchases over the past twelve weeks have been broadly in line with the borrowing needs of Italy and Spain (its primary targets for secondary market bond buying). In order for this relationship to be maintained (and in order for the ECB to ‘maintain the effective transmission mechanism for monetary policy’) the ECB will likely have to step up its bond purchases in Q1 2012 as the borrowing schedule for both Italy and Spain steps up significantly – perhaps just as the uncertainty is at its peak.

German Chancellor Angela Merkel said yesterday that the “EU summit result cannot be overstated”. The issue that the market continues to battle with is the fact the details of the agreements under the treaty (which are as yet not clear enough for Ireland to see if agreement requires a referendum) means perhaps the comment should have read ‘EU summit result cannot be stated’. She went on to suggest that the EU steps are to be drafted by March and only then can the national leaders go to their parliaments (or to the nation) for ratification.  

The EU17 may find the answers to their respective crises in the long run, however as J M Keynes famously said “in the long run we are all dead”.

Tags: forex, EURUSD, GBPUSD, EURCHF, EURGBP, Consumer Price Index, London Interbank Offered Rate 92 Views 0 Like! 0 Comments 0 Follow In order to like something, you need to be a member.
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