The mood music in markets was decidedly nervous and unsettled yesterday, made worse by a lack of liquidity due to holidays in both Japan and the US. The impulse towards risk avoidance helped the Japanese yen in particular, although the dollar also had a healthy bid.
In contrast, the euro, pound and Aussie were all on the defensive. At one stage EUR/JPY fell 1% to 101.20 while GBP/JPY similarly dropped more than 1% to 125.50. Propelled by strong buying interest from some American banks, USD/JPY fell to 78.15. Overnight however the dark clouds have lifted, aided by a much stronger performance from the Shanghai Composite, a jump in iron ore prices, some short-covering in otherwise thin markets and encouraging words from Europe’s finance ministers regarding the efforts of Greek politicians.
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The single currency for instance is back up near 1.30 after falling to 1.2938 yesterday. After declining to 1.0150 yesterday, the Aussie has bounced back sharply, helped by a short squeeze, some aggressive buying at lower levels, and higher commodity prices. That said, the Aussie will probably find it very difficult to break through 1.0250 in the short term. Likewise, the euro will probably struggle to get much above 1.30 in the short term. Sterling continues to disappoint, against both the dollar and the euro – EUR/GBP reached 0.81 overnight. Looking ahead, today marks the commencement of the quarterly US earnings-reporting season. Analysts expect US companies to release subdued profits numbers. Also, Europe’s finance ministers meet today after yesterday’s Eurogroup meeting and the Fed release its latest Beige Book.
Commentary
Euro bulls still hopeful. It did not start too well for the single currency yesterday, as it fell all the way back to a low of 1.2938 before some buying gradually emerged. On Friday, it had all looked so bright, with the euro reaching 1.3072. At least from a technical perspective no real damage has been done thus far. The upward-sloping trend-line evident since the last week of July continues to be respected, and the single currency remains comfortably above all of the critical moving averages. However, those with a positive disposition towards the euro will be disturbed that it has slipped back under 1.30 so quickly. One explanation for the more wobbly tone was concern that the meetings of European finance ministers over the first two days of this week would simply be a reminder that much still remains to be resolved. Also, the situation in both Spain and Greece remains troubling. On balance, we are likely to see some buying support at these lower levels, if only because both traders and investors remain incredibly short the single currency.
