Headlines • Moody's announces that it will revisit the ratings of European nations in the first quarter of 2012, noting “the absence of measures to stabilise credit markets” from the EU summit
• Bundesbank raises serious objections to EU summit plan to channel up to €200 billion from central bank reserves through the International Monetary Fund
• Commerzbank looks “increasingly likely” for a government bailout – Financial Times
• Australian trade balance falls to A$1.6 billion in October, versus A$2.0 billion expected
• Chinese stocks fall 1% to their lowest level since March 2009
Market reaction
The euro lost ground and the dollar and the yen advanced on Monday as optimism prompted by the EU summit at the end of last week faded.
Haven demand for the dollar and the yen intensified as equities gave back some of Friday’s gains on concerns that the EU’s plan would do little to immediately address the debt crisis engulfing the region and as investors eyed the reaction of rating agencies to last week’s talks.
A warning from Moody’s over European sovereign ratings and reports that the Bundesbank was opposed to using the IMF as a vehicle to allow the European Central Bank to intervene in eurozone government debt markets both served to undermine the euro.
Meanwhile, talk of a sovereign downgrade for France and speculation that Germany’s Commerzbank might be nationalized also weighed on the single currency.
EURUSD dropped below $1.3300, while EURGBP fell to a one-month low under £0.8500 and EURCHF traded down to SFr1.2330.
GBPUSD also came under pressure, dipping below $1.5600 early in the session. Elsewhere, commodity-linked currencies suffered as fears over Chinese growth sent shares in Shanghai down to their lowest levels since early 2009.
AUDUSD also sagged as Australian trade figures came in worse than expected, dipping below $1.0100. The New Zealand and Canadian dollars also lost ground.
USDJPY remained in a tight range, holding steady at ¥77.90.
Positioning
The latest IMM commitment of traders report, issued by the CFTC, showed a reduction in long dollar positions by almost $4 billion as investors moved into commodity currencies.
This is the first time in three weeks the net long in the dollar was reduced; dollar long now stands at $15 billion.
However, this was not because of a noticeable reduction in risk from Europe, according to Camilla Sutton. The chief currency strategist at Scotia Capital said: “EURUSD shorts remained largely intact as the market added to short USD positions against other currencies.”
The euro net short was reduced by 8,488 contracts, largely through the addition of new long contracts rather than an unwinding of existing shorts. The euro net short now stands at 95,814 contracts with a dollar value of $16 billion.
Strong buying in the Australian dollar brought the net long in the Aussie to 29,824 contracts, up from 12,542 the previous week. Investors pared back the net short in the Canadian by 6,698 contracts, reducing the net short to 20,824 contracts. The small New Zealand dollar net long of 3,857 was largely unchanged.
The net long in the yen remained intact at 38,271 contracts, falling by just over 2,000 contracts from last week.
Positioning in the Swiss franc rose only slightly: investors sold 1,831 contracts, bringing the net short in CHF to 11,158.
Flows
Banks reported stop loss selling orders were triggered as EURUSD broke down through $1.3300 and again through $1.3280.
Traders reported a large sell order in EURGBP, which took the cross sharply down through £0.8500 during the London morning session.
Analysts say euro is looking very weak from a technical perspective, especially against the dollar and the pound.
A top-five bank reports heavy selling of EURCHF, but the cross remained bid around SFr1.2330 level. That suggests that traders are wary of more official action from the Swiss National Bank to raise the floor in EURCHF after its policy meeting on Thursday.
AUDUSD dropped from highs above $1.0200 down close to $1.0100, with traders reporting corporate selling interest as well as signs that investors were squaring positions ahead of the year end.
Swaps
The widening of spreads in the basis swap market on Friday suggested that funding stress remained elevated despite the steps taken by EU leaders towards fiscal integration.
Figures on Monday show bank deposits with the European Central Bank rose to an 18-month high as cash is hoarded, undermining the impact of the liquidity provisions announced by the ECB at its policy meeting last week.
Banks parked €334.9 billion with the ECB overnight on Friday, up from €310 billion the previous day and the most since June 2010.
The benchmark EURUSD three-month cross currency basis swap stood little changed at -123bp, reflecting the premium in the market for obtaining dollar funding.
What to look for
Analysts at UBS believe that GBPUSD is a sell at current levels, given the likelihood that the Bank of England will expand its asset purchase programme while the Federal Reserve holds off from a third round of quantitative easing.
The Bank of England has already announced another £75 billion of gilt purchases to February 2012 on top of the £200 billion of bond buying in 2009. But UBS believes further deterioration in UK economic data – retail sales, wage claims and unemployment are all due this week – will mean further action from the bank.
“Since April the UK jobless rate has risen from 7.4% to 8.3% and further increases are likely to make the BofE extend its current round of quantitative easing, we believe, by another £75 billion of government bond purchases beyond February,” says Mansoor Mohi-uddin, head of FX strategy at UBS. “We see GBPUSD remaining a sell on rallies with a test of 1.50 likely over the next one to three months.”
Spot, 6.45 EST
EUR: Current: 1.3265 Open: 1.3380 Support: 1.3250 Resistance: 1.3430
GBP: Current: 1.5620 Open: 1.5650 Support: 1.5580 Resistance: 1.5750
EURGBP: Current: 0.8488 Open: 0.8540 Support: 0.8450 Resistance: 0.8570
CHF: Current: 0.9288 Open: 0.9235 Support: 0.9180 Resistance: 0.9330
EURCHF: Current: 1.2326 Open: 1.2355 Support: 1.2320 Resistance: 1.2430
JPY: Current: 77.79 Open: 77.60 Support: 77.10 Resistance: 78.29
EURJPY: Current: 103.23 Open: 103.80 Support: 102.90 Resistance: 106.20
AUD: Current: 1.0118 Open: 1.0205 Support: 1.0080 Resistance: 1.0230
NZD: Current: 0.7671 Open: 0.7750 Support: 0.7500 Resistance: 0.7750
CAD: Current: 1.0236 Open: 1.0170 Support: 1.0130 Resistance: 1.0250