Eurozone Core, USD Index & Swiss Knife

by Ashraf Laidi
Jun 11, 2010 19:19 | 43 Comments

The 1.2% decline in US April retail sales deals a rude awakening to the low-volume rally in equities as well as the recent bounce in the euro. Just when EURUSD was attempting to make its 4th daily increase (EUR hasnt had more than 3 straight daily gains since December), the risk aversion stands in the way. EURUSD would have had to close Friday above $1.21 in order to overcome its inability to post 4 consecutive daily gains this year. Once again, this won't happen. And despite Fitch positive remarks on Hungary, stating that the central bank has sufficient funds to cover its financing needs into the rest of 2010, the euro continues to struggle below $1.21. But the impact of risk aversion on the single currency has extended losses towards a prelim target of $1.2040 (morning report to clients). Frequent readers of my analysis and followers on twitter are familiar with my $1.1650 target in EURUSD. Todays failure to regain $1.21 is another step into that objective.

EURUSD The only time when we saw the opposite of the above situation i.e. (rising euro, falling stocks and falling gold) was three weeks ago, when Chancellor Merkels ban on naked short selling, prompted the Swiss National Bank to intervene aggressively. As a result, EUR rallied across the board, dragging gold against it (and rest of currencies), while global equities sold off. We expect the single currency to head back below the $1.1870 later this month, before calling up our interim target of $1.1660. Selling the rallies remains the name of the game, only this time, the rebounds are short-lived and the reasons to attack core-nations more plentiful.

Attacking the Core

If we get more days like June 7-8, then the Eurozone area may be unfolding into a mini-contagion. Selling is intensifying in the bonds of core Eurozone nations as the yields on French and Italian government bonds soar relative to their German counterparts. French-German 10-year spreads have doubled to 57 bps in less than a week to reach their highest since March 2009, while the Italian-German 10-year spread hit a euro-life time high of 179 bps. Spains 10-year spread with Germany hit 214 bps and is expected to surpass the 250-bp mark.

Eurozone Core, USD Index & Swiss Knife - Spngerspreadjune8 (Chart 1)

Eurozone Core, USD Index & Swiss Knife - Frager10yrsprdjune8 (Chart 2)

One striking component of the attacks on core nations' bonds is that spreads in Greek and Portuguese bonds are less than half their May highs of 1000-bps and 350-bps respectively. Such are the embryonic signs of a contagion, which prompts traders to force the hand of healthier sovereign bonds. Rumours of substantial derivatives losses at Societe Generale and of an Italian downgrade were unsubstantiated but are far from impossible. The more immediate danger is the reality that French banks account for half of the EUR 76bn in Greek debt lent by the Eurozone, with German banks accounting for about a quarter of that.

USD Index Eyes Record Gains

Eurozone Core, USD Index & Swiss Knife - Usdxjune7 (Chart 3)

The US dollar index is set to post its 7th monthly consecutive increase, the longest winning streak since the history of the 39-year old index. The USDX is basket of 6 currencies (EUR 57%, JPY 14%, GBP 12%, CAD 9%, CHF 4% and SEK 4%). The chart below shows the USDX is testing the trend line resistance at 88.10, extending from Jan 2006 high. More importantly, right above it, is the 88.60-70 resistance, which is the 38% retracement of the decline from the February 2002 high to the March 2008 low. This level also coincides with the March 2009 high (stocks bottom). A double top in USDX would likely emerge by fresh dosage of Fed-driven liquidity boost and a resulting equity rally. A break above 90 would encounter preliminary resistance at 92, until the key obstacle of 95.50 stands out. Bear in mind that a break above 90 is a price equivalent to sub $1.1700-1.1650 in EURUSD.

Setting euro price action aside, non-USD currencies remain handicapped as long as the elusive 200-day MAs in S&P500 (1107) and Dow-30 (10309) are not breached. Both levels have acted as key obstacles since May 20, coinciding with fading gains EUR, AUD and other risk currencies. Speaking of AUDUSD, the pair remains unable to regain the 0.8550 resistance since May 19, which failed at 3 occasions (May 28, June 3 and June 11). Selling the rallies at 0.8540-50 in AUDUSD is equivalent to the double top in NZDUSD at 0.6890. I continue to expect a retest of 0.8410 trend line, before 0.8280 emerges as interim foundation.

Swiss franc Knife Still Sharp

Aside from the strikes in Spain protesting the barely passed austerity policies, increased evidence of the Swiss National Banks failure to follow through on its euro-supporting interventions is adding to the losses in the euro. EURCHF knifed through new record lows of $1.3740, 10% below the so-called line-in-the-sand from last May of last year. Recent Swiss data has shown decent figures, including a 2.2% annual increase in Q1 GDP growth. Consequently, markets anticipate a more passive SNB, which only exacerbates the sell-off in EURCHF. But rather than chasing the pair below 1.35, it is more viable to use CHF longs against USD to hedge out the risk aversion longs in the US currency. This is also supported by the struggling weekly USDCHF chart, whose technicals increasingly suggest 1.1080 to be a reality before summer end. Reconciling a struggling USDCHF with a drifting EURUSD implies renewed downside for EURCHF. But dont rush into selling EURCHF below 1.40. The weekly chart appears oversold, which suggests another 200-300-point bounce before downside resumes.

Comments (Showing latest 10 of 43) View All Comments
said
mulhouse, France
Posts: 2822
9 years ago
Oct 26, 2010 16:57
ashraf
do u think it will the .95 within this time frame?
thanks
said
France
Posted Anonymously
9 years ago
Oct 26, 2010 15:02
.981 reached
now time for .95 within next two/three wks
said
mulhouse, France
Posts: 2822
9 years ago
Oct 20, 2010 9:20
bojan
DOLLAR SWISSIE AT .981 then heading to 95

as for euroswiss it touches a resisitance and poised to go down
bojan
Arizona, United States
Posts: 111
9 years ago
Oct 20, 2010 5:01
Ashraf,

do you still see 1.25 in EUR/CHF ?


thank You


b.
said
mulhouse, France
Posts: 2822
9 years ago
Oct 19, 2010 23:06
http://www.bebesymas.com/default/top-10-carritos

achnacarry two

or

los kadetes de linares el carrito. pemex monte de piedad
Posted Anonymously
9 years ago
Oct 17, 2010 11:41
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Jul 12, 2010 20:07
Chance, Not nuch chance for 1.12 in USDCHF. I said many times on this site, buying USD is preferable when done selectively against EUR, AUD and GBP but not necessarily against CHF.

Ashraf
chance(berjoe1@hotmail.com
tripoli, Lebanon
Posted Anonymously
9 years ago
Jul 12, 2010 11:55
what is ur opinion now after one month of ur article? will the pair be buoght again and reach 1.12 on the long term?
Stationdealer
London, UK
Posts: 715
9 years ago
Jul 6, 2010 20:41
Niall Ferguson Rips Paul Krugmans Policy Reccomendations

http://www.youtube.com/watch?v=_nRLiZrkHEY&feature=player_embedded#!


Niall Ferguson of Harvard University spoke with Bloomberg Television on the subject of bond markets and the threat of a speculative bond attack against the United States.

0:35 Bond vigilantes are similar to those who were shorting invest banks a few years ago. They will keep climbing the quality of countries, similar to how they did with banks.

1:35 There is no example in history of any country growing out of this sort of debt position, except for Britain in the early 1800s, which had empire and industrial revolution on its side.

2:10 What is worrying is that there is no inflation, which is the easy way out of this sort of financial situation. Default now seems the only escape, and the U.S. may choose that path with unfunded liabilities like Social Security.

3:00 Nothing would scare the market more than if the government followed Paul Krugmans call for more stimulus.
Stationdealer
London, UK
Posts: 715
9 years ago
Jul 6, 2010 20:36
Banks Dont Pay Taxes; People Pay Taxes

The fate of the financial reform legislation in the Senate apparently depends on whether it contains a tax increase. The conferrees hastily re-convened to remove one tax objected to by Senator Brown. Okay. That was a good move. But lets not forget a couple of basics: (1) the imposition of massive new regulations on the banking and financial system will raise costs that may not be called taxes, but will have a similar effect. (2) the incidence of that cost-tax probably wont be what was intended. Banks, like other businesses, will likely pass most of the additional cost onto their customers.
http://taxesandbudget-blog.ncpa.org/