By Dean Popplewell
With little data out today, this morning’s market movement has been driven mostly by talk of ECB demand for Italian debt in the secondary market. The weeks trading decisions have been dominated by euro yield movements and the Bund spread. If it was not an Italian problem, then it was Spanish or French. Intra-day trading has mostly been a carbon copy of the day before, little change in theme, same toxic variables, and a market all thinking they want to apply the same trade "but not at these levels."
In FX we have witnessed a market suffering a slow motion meltdown. With CHF out of the equation, because of the SNB actions, the USD and JPY have gained significantly against the EUR, commodity bloc and EM currencies compared to this time last week. The surprise to most has been how orderly and gradual the moves have occurred. Normally, with any risk aversions trading strategy decision, “Panic” seems to be the outlier as investors all run for the exits at the same time.
Analysts attribute the relative stability in the currency markets to three factors, “positioning, reserve manager activity and caution over potential policy response”. We should be able to throw in other adjectives like jaded, clueless, resigned and fearful. There are obviously many more.
What have we got to look forward to in the short term? Presently, the EU policy process remains adequate for preventing worst case scenarios in the eurozone, but for how long? It’s all about capital market confidence and the public Franco-German spat over the legal and political role of the ECB does not help. With the ECB not acting as a crisis backstop, risk reward remains favorable for the dollar and yen. Stronger US fundamentals are not part of any equation, albeit a prerequisite, they are not yet a trend and remain vulnerable to consistency due to the euro-sovereign debt crisis.
The pressure on the ECB to resolve this crisis is reaching a tipping point. Something has to give, either the ECB cracks or the EUR. Place your bets!