First, here’s a summary of the biggest gainers and losers this past week in forex, in summary and detail format by currency.
Currency Strength Rankings Weeks of December13-24
We measure strength based on relative gains from Dec 13 to Dec 24, to give us an overall sense of trend over the prior 2 weeks.
STRONGEST TO WEAKEST: CHF, USD, AUD, JPY EUR CAD, NZD, GBP
STRONGEST TO WEAKEST: AUD, CHF, JPY, CAD, NZD, USD, EUR, GBP
Patterns To Note:
Even though the past week was characterized more by risk appetite than the prior week, the CHF and AUD remain in the top 3 for the second straight week, suggesting underlying economic fundamentals have been more important than sentiment.
The British Pound retains its place at the bottom for the second straight week, and the EUR is becoming weaker despite the more ‘risk-on’ character of the prior week.
Up vs. the EUR, GBP,
Down vs. the CHF, JPY, CAD, NZD, AUD
The greater risk appetite from stocks rising to 2 year highs combined with lackluster data weighed on the US Dollar.
Up vs. GBP
Down vs. USD, JPY, CHF, CAD, NZD, AUD
Considering all the bad news out of the EU, with multiple credit downgrade warnings to Portugal and Spain (following additional warnings in past weeks to these nations and Belgium too), as well as continued rising rates for PIIGS debt as per both actual bond auctions and CDS spreads, no surprise the EUR has been dropping. That there are still no long term solutions in sight suggests further downside risk into 2011.
Up vs. the USD, GBP, EUR, CAD, NZD
Down vs. CHF, AUD,
The Yen is benefitting from its safe-haven status despite an overall risk averse week. News out of Japan was not great, yet the safe haven Yen continues to hold in the middle of the relative rankings.
The Pound was down vs. all for the past 2 weeks for the second straight time, on essentially the same story.
Bearish fundamentals of its own include tepid data and continued elevated inflation data that suggests no the BoJ is stuck between
· Inflationary data that means it needs to raise rates. Indeed, stronger retail data supports rising prices.
· An austerity induced economic slowdown, indicated by a dour jobs report that needs continued loose monetary policy that risks further inflation. Anxiety over the EU and debt owed from Irish banks didn’t help.
· In addition, the past week saw UK public spending actually rise despite ongoing austerity measures.
Other negatives include:
Technical resistance for the GBPUSD also suggests continued bearish bias.
The Moody’s downgrade to Ireland caused the GBP to sell off hard given the UK’s exposure to Ireland
UK banks have major exposure to Spain and Ireland. A Lloyd’s Banking Group announcement Friday gave some disturbing details. See the summary table below to see how exposed the UK and other core regional economies really are to Ireland, Portugal, Greece, and most importantly, Spain.
Like the EUR, we see more downside than upside risk heading into 2011.
Up vs. all except down fractionally vs. the AUD
The CHF is the only safe haven currency that actually has strong economic fundamentals behind it that makes it the ideal safe haven in times of fear. Beware, however, that the EU is the Swiss’s primary trading partner and this currency suffered when the Greek crisis hit full bloom. That makes us wary of getting too long the CHF with the EU still so troubled.
Still, of the major currencies, the CHF and AUD sport the strongest underlying economies, a fact that will limit their downsides in all but the most extreme overbought conditions.
Up vs. the USD, EUR, GBP, NZD
Down vs. the JPY, CHF, AUD
A rise in both risk appetite and oil prices helped the CAD despite lackluster data.
Up vs. USD, EUR, GBP
Down vs. JPY, CHF, CAD AUD
Despite the risk-on week, the Kiwi is suffering from lower than expected GDP and as usual, a less robust economy than that of the AUD, which it basically tracks anyway.
Up vs. all
The Aussie is benefitting from both solid fundamentals and a risk-on week. Beware, however, that if markets react negatively to China’s rate hike announcement this past Saturday, the AUD is likely to suffer, given that its economic fate is largely tied to China’s.
Looking Ahead To 2011
Themes that are likely to dominate FX markets include:
EU Sovereign Debt/Banking Crisis Dominates
Ongoing EU Crisis was the big concern last week. Related EU worries continue to pressure the risk currencies, especially the EUR. Past week’s troubles include:
- Warnings of further credit downgrades for Portugal and Spain
- Downgrades to Ireland, Hungary
- Rising PIIGS bond rates at both auctions and CDS spreads
- Ireland needed to supply further bailout funds to Anglo-Ireland Band
Here’s the best summary of which European economies are most exposed to PIIGS debt trouble.
Image: Mish's Global Economic Trend Analysis 03 dec 18 22 h
The key point: Spain is badly exposed to Ireland and Portugal, and the core economies of the EU, especially Germany, France, the UK, as well as others (never mind the US) are badly exposed to Spain.
Do you see now why Ireland and Portugal are big concern – they threaten Spain, which in turn threatens the whole EU banking system that holds their bonds.
Why CHF Strength If EU Worries?
While the CHF tends to suffer along with the EUR, the fact that the CHF is the only safe haven currency backed by a relatively healthy economy often makes it the safe-haven currency of choice, especially when the EU crisis is not at full boil. Remember too that the franc is a natural currency EUR hedge alternative to hard assets like gold.
Continued overall good data out of Australia, like the past week’s job numbers, allowed the AUD to be among the strongest performers despite the overall risk aversion theme. Tied far more to China, which is still consuming Aussie mining products, the AUD can at times resist overall risk aversion, especially when that sentiment is primarily driven by EU rather than China concerns.
AUD Strength To Continue?
The answer to that question will depend primarily on China, Australia’s prime export market. While China is expected to slow somewhat, growth is still expected to remain robust, especially relative to the developed world. Thus even though we expect pullbacks in risk assets in 2011, the AUD should show relative strength, certainly compared to the EUR, GBP, NZD, and possibly the CAD. While the CAD has similar commodity strength, and has the advantage of being more focused on energy and gold than Australia, Canada’s its primary export market is the US, which is worse shape than China
For details on the coming week’s key economic calendar events and themes, and likely key market movers, visit www.fxinsights.com and look under the Weekly tab.
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DISCLOSURE & DISCLAIMER: AUTHOR IS SHORT THE EUR, LONG THE CAD, AUD AND USD, LONG SELECTED EQUITIES HELD AS LONG TERM INCOME/GROWTH INVESTMENTS, SHORT THE OVERALL STOCK MARKET FOR HIS PERSONAL PORTFOLIO. THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER