Finland’s Vote Hurts EURO

April 16 2011 by Spencer McKay in Forex Release |No Comments

Asian equity markets were mixed as China hiked reserve ratio requirements another 50 bp. Considering China’s loose monetary conditions and higher inflation data last week, the move should have come as no surprise. While Chinese rhetoric remains tough as inflation continues to trend higher, the overall pace of tighten remains subdued, giving us confidence that officials will not completely sacrifice growth.
As widely expected, this weekend’s G20 lacked any real significance. Members agreed to measure imbalances in the indicators already selected in February such as fiscal deficits, the private savings rate, public debt, private debt, and the current account balance (however these are indicators and give members plenty of wiggle room). The G20 communiqué released didn’t mention currency intervention explicitly but articulated a “readiness to provide any needed cooperation” to support Japan in the aftermath of the earthquake.

Considering the stretched short JPY position, which had been fueling the world’s carry trades as of late, the recent move follows the historical pattern of carry trades. The abrupt correction should not unexpected or alarming and further it doesn’t change our positive view on the interest rate differential trade.

EURUSD sold off from 1.4450 to 1.4300 while USDJPY eroded further from last week’s 85.51 high to 82.79. It seems that risk appetite is easing out of the FX market as the short trading week kicks off. With the lack of significant news, it seems the primary culprit for the change in sentiment was the outcome of this weekend’s Finnish elections. The nationalists / Euro-skeptics “True Finns” took an unexpectedly large 19.1% of the vote (second highest number of seats in parliament). The surprising turnout increases the probability that an anti–European government coalition will be formed that has the ability to veto Finland’s participation in EU bailouts.

We are also cautious that True Fin is not just using the Euro bailouts as divisive subject to drum up votes but may actually try to block the funds once in power. Of course the alternative is that like Obama’s “change”, once in power the new Finnish ministers will realize the situation is extremely complicated and concede the funds.

Once True Finn is invited into the coalition government, pro-Europe forces will still be in the majority. Concessions on supporting the EUR and enlarging the EFSF and ESM as Portugal’s financial appeal goes through should continue. Despite our constructive view on the EUR, pressure is clearly mounting in yields and CDS (not helped by Friday’s Irish downgrade by Moody’s) although it has yet to fully trickle down into the single currency. Besides concerned that the Finnish votes will block capital to Portugal, pressure is mounting on Greek to restructure its debt. Greek 5-yr sovereign debt yield climbed to an all time high of 10.63% while Greek 5 yr CDS rose to 1220 bp, up 84 bp on the day.

US Treasury Secretary Geithner weighed in on the subject and suggested that he was in favor of Greek debt restructuring. Short of any game-changing news, we are buying into the bearish EURUSD corrections for a move back to 1.

This week’s “flash” PMI in France and Germany will be the data prints to watch but political news will trump economic news in Europe.

00:00 EUR European Commission, ECB and IMF officials discuss with Portugal
12:00 Hungary: Interest rate announcement, % 6.00
14:00 EUR ‘Flash’ consumer confidence, index
14:00 USD NAHB housing market index Apr
14:30 USD Dallas Fed President Fisher (FOMC voter)
15:15 EUR ECB Governing Council Member Christian Noyer
16:00 USD St. Louis Fed President Bullard (FOMC non-voter)
16:30 USD Dallas Fed President Fisher (FOMC voter)
17:00 SEK Finance Minister Borg speaks

The Risk Today: EurUsd There have been three very bearish developments in EURUSD since Friday morning’s report. First off, the 2-3 week uptrend channel that has been guiding us off the 1.4023 lows has now completely broken down which indicates the bulls have lost their dominance. Secondly, there is a bearish engulfing candlestick on the daily chart which reaffirms that the bears have assumed control of the pair in the near-term. Thirdly, there appears to be a head and shoulders pattern activated on the hourly chart with a neckline at 1.4377 and a target around 1.4235. We have therefore gone short on the break below the neckline and expect very little support to stand in the way of reaching our target (only hurdle will be the 7 Apr low 1.4243). For those that missed the initial move, we still feel there’s good value in selling rallies around 1.4350. Should the move overshoot our target then watch for pockets of demand at 1.4152 (5 Apr low), 1.4062 (1 Apr low), 1.4023 (28 Mar low), and 1.4000 psychological support. Resistance levels are now eyed at 1.4520 (the 12-13 Apr highs), 1.4580 (seen on 13 Jan 2010), 1.4686 (14 Dec 2009 high) and 1.4776 (11 Dec 2009 high).

GbpUsd GBPUSD continues to meander sideways in a range roughly between 1.6230 and 1.6430, but the pair has spent a lot more time in the lower half of its range over the past couple of days’ trading than the upper half, so our bias is that the downside is the more vulnerable at this stage. Regular readers may recall that we went short around 1.6350-60 levels last week, but now as we approach the range floor, we have decided to square our position and bank around 100 pips profit. We are not adverse to reinitiating shorts on a break below the range floor, but for now the risk-reward favours exiting shorts and waiting. Should that break occur, next supports are 1.6092 (5 Apr low), 1.5973 (1 Apr low), and 1.5937 (28 Mar low). If the pair rebounds towards the range highs, we would also be happy to re-enter shorts around 1.6380-1.6410, setting a tight stop above 1.6430. Strong resistance at 1.6428 (8 & 11 Apr highs) should afford us some protection above, with further resistance eyed at 1.6458 (19 Jan 2010 high), and 1.6516 (7 Dec 2009 high).

UsdJpy USDJPY remains firmly in a downtrend having hit new lows of 82.79 today, but given the slowing momentum on the downside, we have now adjusted the 1-2 week downtrend channel to a slightly less steep slope. We still expect plenty of pockets of supply to keep a lid on further rallies; first resistance stands at 83.79 (Friday’s high), then 84.79 (12 Apr high) and 85.52 (6 Apr highs). Nearest support on the downside is now seen at 82.56 (31 Mar low), 81.55 (29 Mar low), and 80.51 (18 Mar low).

UsdChf USDCHF has not really moved that far in either direction since we last spoke on Friday, with the pair still hovering around the mid-0.89 levels. Nevertheless, the lack of another dip through the lows has meant that our reigning 2-week downtrend channel has now been broken, so we are wary that a lot of excess short positions could start to be squeezed out soon. Resistance levels now stand at 0.8892 (13 Apr high), 0.9105 (11 Apr high), 0.9202 (7 Apr high), 0.9296 (6 Apr high), 0.9340 (1 Apr high), 0.9369 (9 Mar high) and 0.9392 (23 Feb high). We really need to see a push below 0.8896 all-time lows before we would enter new short positions, but should that development occur then there is very little standing in the way of a move to 0.8500 levels.

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