FX Commentary from Michael Hewson

Today’s EU summit is likely to be a rather testy affair after reports on Friday that Berlin wanted more stringent EU oversight of Greece’s finances in return for a new bailout,  as concerns grow over the country’s ability to deliver on its financial obligations.

Items on the agenda to be discussed include the fiscal compact as well as the European Stability Mechanism (ESM) and the (FTT) Financial Transaction tax.

In any case all of these items remain secondary to the main problem exercising investor’s attention at the moment, which is the problem of a new bailout for Greece, as well as the agreement on the (PSI) private sector involvement.


New bailout talks look set to continue with speculation that any agreement will insist on new austerity measures to bridge a new funding gap, while Friday’s German additional EU oversight demands have not gone down well in Athens, prompting widespread anger.


Greek Finance Minister Venizelos rejected any notion of reduced Greek fiscal oversight outright, and there is deep unease that the suggestion was made at all, but they underline German, as well as IMF concern about the Greek government’s ability to implement the measures being asked of them now, and in the future.

Talks with Greece’s private creditors are said to be progressing and agreement apparently reached with respect to a debt restructuring to the tune of a 70% haircut, but this has been the line for the past two weeks and there still appears to be no official confirmation of the fact.

It would also appear that due to further fiscal deterioration in Greece’s finances a funding gap has opened up since the second bailout was agreed in October which needs agreement on further measures to close it.

The argument revolves around who fills this gap. Will it be Greece, with further austerity measures, or asset sales, or the ECB in giving up its profits from Greek bond purchases?

Until this issue is resolved and Athens acquiesces to further troika demands in return for a second bailout, any prospective PSI agreement announcement could well be delayed.


The action by ratings agency Fitch in finally delivering on its long awaited threat to downgrade Italy, Spain and three other European countries with a negative outlook, barely caused a ripple in currency markets on Friday, probably because the downgrades had been so well telegraphed before hand.

In any event unlike Standard and Poor’s, the agency reaffirmed France’s triple “A” rating as well as all the other triple “A” country ratings in Europe.

Given that Italy’s bond yields have dropped sharply in the past few days in the wake of some successful short term auctions, today’s 5 and 10 year auctions will be a key test of investor demand for the country’s longer term paper, especially in view of Friday’s downgrade by Fitch. The auctions are for up to €4bn of 2017 and €2bn of 2022 paper.

EURUSD – the single currency has continued its recent rally holding above the 1.3060 support as it closes in on the 1.3250 38.2% retracement of the down move from the October highs at 1.4250 to the recent lows at 1.2610. A break here could well target a deeper move towards 1.3450.

To reopen a downside move we would need to see a break below 1.3060 to retarget last Wednesday’s lows at 1.2940/50 level which prompted the sharp rebound at the end of last week.

The key support level remains around the 1.2850/60 area and only below this level reopens a move towards the key 1.2600 level which represents the 76.4% retracement of the up move from the 2010 lows at 1.1880 to last years highs at 1.4940. This support level also coincides with the August 2010 lows at 1.2590.

GBPUSD – ten successive up days has seen the pound push close to but not as yet exceed the December highs at 1.5770, just about keeping the bias to the downside and the longer term downtrend intact. Only a move above 1.5780 targets a move towards 1.5920 and slightly above that the 200 day MA 1.5968.

The 1.5550 area looks like to continue to act as support on any move back lower, which if broken, could see a move back to 1.5360.


EURGBP – the single currency is homing in on the resistance around the 0.8420 cap.

While 0.8420 caps the focus remains for further euro losses back towards the September 2010 lows at 0.8200/05, which remain the key obstacle to further declines towards the 2010 lows at 0.8065. A break of 0.8420 could well trigger a sharp move towards 0.8500.


USDJPY – last weeks failure to get above the 200 day MA at 78.30 has seen the US dollar drop sharply once again raising concerns about the strong yen, and possible central bank intervention from the Bank of Japan.

It needs a move beyond these two resistance levels to target a move towards the October 2011 highs at 79.55. The lows this month and in November at 76.50 remain the key support

Only a move and close below 76.50 opens up the all-time lows at 75.30.


Equity market calls

FTSE100 is expected to open 16 points lower at 5,717

DAX is expected to open at 24 points lower 6,488

CAC40 is expected to open 20 points lower at 3,299

FTSEMib is expected to open 60 points lower at 15,887

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