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By Gaurav Kashyap, Alpari ME DMCC
It was largely a tussle between increasing risk sentiment and risk aversion, with the former edging out and seeing modest gains in the currency markets. The Euro gained some 30 pips against the Dollar, with the Pound gaining a mere 7 pips. The Aussie gained a more respectable 1.1% against the Greenback while USDCAD snapped a two-week slide to close below 1.400 levels.
Gold gained $14 on the week while West Texas Crude futures bounced from their mid 70s range to close the week above 82 per barrel.
Greece posts increased budget deficit, sell off continues
The week kicked off with the markets opening at a lower gap as Greece announced over the previous weekend that its budget deficit for 2011 increased to 8.5% of overall GDP, this well above the 7.6% target required by the Troika. This would equate to an additional EUR2bn in bills payable by the Greek government by this year. The latest in the Greek saga saw markets open void of risk appetite as the Dollar gained nicely across the board.
The negative sentiment pinned down the markets that Monday's positive US ISM manufacturing reading wasn't able to salvage the optimism. The index beat expectations (51.6% act v 50.6% prev) while the production index increased to 51.2% (v 48.6% prev). Perhaps markets focused on the lack of growth in new orders index (unchanged at 49.6%) and the latest from Greece which saw the S&P close Monday's session at the lowest it's been in 2011 - at the exact same price it closed three years earlier at 1099.23.
The selloff continued into Tuesday after EU finance ministers delayed their decision in confirming Greece's sixth tranche of bailout money worth EUR8bn. Risk appetite got a nice boost however after a report in the FT suggested that EU officials were thrashing out a plan to recapitalize European banks and this saw equity markets reverse their previous losses, led by particularly strong gains in financial stocks. Gains were short lived in Euro crosses however after a string of downgrades in Italian and Spanish debt.
Italian, Spanish ratings downgrades rocks risk appetite
Italy was downgraded three notches by ratings agency Moody's late on Tuesday from Aa2 to A2 with a negative outlook. The action was followed by Fitch who on Friday downgraded Italian debt from AA- to A+ and also downgraded Spanish debt to AA- with a negative outlook.
Friday's double downgrade rocked risk appetite in the markets and was a stark reminder that the troubles in the Eurozone periphery are far from over. Most of the gains on optimism from Friday's improved Non-farm payrolls reading evaporated with the downgrades and EURUSD closed at 1.3377. The Euro will find stiff resistance in the channel between 1.3500 and 1.3600 and will once again find volatility in the week ahead.
US Dollar boosted, despite unemployment figures
The US dollar got a nice boost early in the week on the back of a rather dovish testimony by Fed Chairman Bernanke in front of Congress. The Fed Chairman hinted that inflation wasn't as much of a concern as the sluggish growth rate due to the lack of job creation in the US economy. Bernanke would have been optimistic following the release of Friday's US jobs number which saw a strong gain of 103,000 new jobs, stronger than expectations of 60,000 new jobs. August's reading was revised upwards from zero to 57,000 jobs added.
The upward revision was as a result of 45,000 telecom workers who returned to work following a strike in August.
Staff
