Time For The EUR To Take A Breather
Ipek Ozkardeskaya | Jan 26, 2015 05:56AM ET
Forex News and Events
The EUR-complex finally takes a breather after 5-figure dive last week on massive ECB stimulus package and Greek elections. The Greek bonds rallied, the sovereign curve steepened in the short end, shifted higher on the back-end after the anti-austerity Syriza’s historical victory on Sunday elections. Syriza reached 149 seats over 300, just short of the absolute majority, Samara’s New Democracy gained 76 seats, and while Golden Dawn placed third confirming Greeks’ crave for change. Nevertheless, we see little chance for a Grexit. Tsipras will certainly renegotiate the Greek debt and the austerity measures before agreeing on the next aid package (deadline on Feb 28th), while keeping Greece in the eurozone. The political pressures should keep the Greek bonds tense over next weeks, while the Greek debt should become eligible for the ECB QE by July 2015. After hitting the fresh low of 1.1098, EUR/USD bounced back at Europe open signaling that the pair is finally ready for short-term bullish correction.
Tensions on EUR/DKK ease. For how long?
EUR/DKK 25-delta 1-month risk reversals started the week slightly higher as EUR-complex stands ready for correction amid last week’s five figure dive. Yet the tensions on EUR/DKK persist as the market did not fully buy the DNB’s two straight rate cuts past week. At least on the derivatives market. By these policy actions, the DNB only pulled the attention on the EUR/DKK peg, while silent FX interventions would have avoided the speculative rush into short EUR/DKK positions. On a side note, we remind that the market for EUR/DKK derivatives is very tight, with very little volume as the EUR/DKK peg is in place for quite a longtime. This means that the sharp moves can simply come from the illiquidity of the market and not because of massive change in positioning. Yet from what we see, the market went aggressive from net EUR/DKK calls to net puts and stays significantly negative.
The low liquidity on the RRs bring us to examine in detail the situation on the futures market. The EUR/DKK 3-month cross currency basis sharply reversed confirming preference for lower EUR/DKK in the futures market. This means that the stress in the markets is now being priced in on the futures curve, extending the issue to months ahead.
The situation today is not alarming per se (given that the preference is not out of historical range), yet further stress is certainly underway for the EUR/DKK peg. While DNB still has room to defend the peg, we believe that two interventions in a week has just attracted speculators’ attention, and might push the bank toward more aggressively defensive strategies in the coming weeks, months. With the massive ECB stimulus and uncertainties on Greek political situation, there is little chance that in the short-run real money names return to EUR. The DNB will possibly proceed with further surprise cuts, and complement its defensive strategy with increasing FX interventions, should the EUR/USD extends weakness to parity! The issue may easily get quite complex as the operation may, as in Swiss situation, get too costly and involve politics in the picture. The EUR/DKK peg came at risk from the moment it has been placed under the spotlight and attracted the market attention - to the extent to trigger an official reaction. The removal of EUR/CHF floor on January 15th showed the speculative forces may get strong enough to abolish official rules. And this is where the speculative volumes may challenge the EUR/DKK peg. For aggressive speculative names, funds, hedge funds, there is clearly money to make in such events. While the timing of such tail event is almost impossible to foresee, in the case of the EUR/DKK peg in place for such a long-time, the major risk is seen on the speculative component of the FX trading.
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Luc Luyet
EUR/USD EUR/USD is trying to bounce. Hourly resistances can be found at 1.1289 and 1.1460 (16/01/2015 low). An hourly support now lies at 1.1098, while a psychological support stands at 1.1000. In the longer term, the symmetrical triangle favours further weakness towards parity. Key supports can be found at 1.1000 (psychological support) and 1.0765 (03/09/2003 low). A resistance lies at 1.1679 (21/01/2015 high), while a key resistance stands at 1.1871 (12/01/2015 high).
GBP/USD GBP/USD has broken to the downside out of its horizontal range defined by 1.5035 and the resistance at 1.5274. Further short-term weakness towards the strong support at 1.4814 is favoured as long as prices remain below the hourly resistance at 1.5058 (20/01/2015 low). Another resistance stands at 1.5213 (22/01/2015 high). In the longer term, the technical structure is negative as long as prices remain below the key resistance at 1.5274 (06/01/2015 high, see also the declining trendline). A full retracement of the 2013-2014 rise is expected.
USD/JPY USD/JPY remains below the hourly resistance at 118.87. However, the recent succession of higher lows (see short-term rising trendline) suggests increasing buying interest. The hourly support at 117.25 (22/01/2015 low) has held thus far. Another hourly support can be found at 116.93 (19/01/2015 low). A key resistance stands at 119.96 (see also the declining channel). A long-term bullish bias is favoured as long as the key support 110.09 (01/10/2014 high) holds. Even if a medium-term consolidation is likely underway, there is no sign to suggest the end of the long-term bullish trend. A major resistance stands at 124.14 (22/06/2007 high). A key support can be found at 115.46 (17/11/2014 low).
USD/CHF USD/CHF is trying to find a new equilibrium after the SNB's announcement. The recent succession of higher lows favours a short-term bullish bias. A break of the resistance at 0.8838 would confirm this view. A key resistance stands at 0.9132. Hourly supports can be found at 0.8672 (intraday low) and 0.8501. Following the removal of the EUR/CHF floor, a major top has been formed at 1.0240. Given that the subsequent panic has not broken the strong support at 0.7071 (09/08/2011 low), this level should hold in the next months. A medium-term sideways move between the key support at 0.8353 and the key resistance at 0.9132 is favoured.
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