Browse
related articles
By Gaurav Kashyap, Head of DGCX desk, Alpari ME DMCC
Move away from safe havens to higher yields
It was a week in which investors ditched their safe haven assets and migrated to higher yielding, riskier assets. The US Dollar sold off across the board; dropping more than 2% against the Euro and falling more than 1.1% against the British Pound. The Aussie Dollar, a currency known for its higher interest rates and therefore such a good gauge for risk moods in the markets, gained an impressive 3.5% against the US Dollar, with the Kiwi also gaining 2.35%. WTI Crude gained an impressive 7.22% on the week with precious metals also moving higher - Gold closed at 1738 (+6.10% on the week) and Silver gaining an astounding 12.71% on the week.
EU leaders were able to put their differences aside and muster up a deal which sees the EFSF expand to EUR1 trillion with Greek haircuts at 50%. The market's reaction to the deal was strong as investors ditched their safe haven assets in favour of higher yielding, riskier assets following confidence that the situation in Europe is under control.
The expansion of the EFSF fund to EUR 1 trillion essentially gives the fund enough fire power to support a European country facing high debt concerns. The announcement also sees up to 50% in haircuts on Greek debt which essentially means holders of Greek debt will be facing write downs of more than half their value. The haircuts will see several European banks woefully undercapitalized following these write downs and with an exposure of EUR 50bn, they will also threaten France and its revered AAA status.
Overall, Wednesday's announcement will see optimism in Europe remain positive in the short term and this should see the Euro remain well bought and the currency normalize above 1.41 levels against the Greenback to close out the year. With the European sovereign debt crisis story expected to move to the background we will continue to follow the story of China's involvement in the EFSF as well as Italy and its measures to bring down its ballooning budget deficits.
US data shows increase in GDP
It was a good week on the US economic docket with last week's headline number showing Q3 annualized US GDP increasing to 2.5% v 1.3% expected. Also improving were the US personal spending and personal income data which increased to 0.6% and 0.1% respectively. New home sales increased to 5.7% act v -0.3% prev. On a negative note, US consumer confidence earlier in the week dropped to 39.8 (v 46.4 prev) while durable goods orders also slowed to -0.8% act v -0.1% prev. Overall the improving data has been improving risk sentiments in the US markets as seen by the gains in US stock markets, the Dow Jones moved 3.9% higher with the S&P500 gaining 4.33%.
The trading week ahead sees a tremendous amount of event risk with a stacked economic calendar; this week sees the FOMC's rate decision and Fed Chairman Bernanke's subsequent speech on Wednesday before the release of the US non-farm payroll jobs report (95K exp / 103K prev) on Friday.
Along with the Fed, the Reserve Bank of Australia will meet on Tuesday to announce rates with many expecting a cut to 4.50% from 4.75%. The ECB also will meet and announce on Thursday with many expecting no change at 1.50%. Earlier in the week, Monday sees the release of the Canadian GDP reading (0.2% exp / 0.3% prev MoM and 2.2% exp / 2.3% prev YoY) with Chinese PMI releasing on Tuesday. We expect to see good support in EURUSD above 1.4050 this week with a potential test of 1.43 levels this week. Of course Friday's nonfarm payroll number will bring the volatility back into the markets - and any gain above 100K new jobs will see the Euro test these levels against the Greenback.
Staff
