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The EUR fell against the USD overnight because investors are concerned about the deteriorating economic situation in Europe. These concerns were heightened yesterday when Germany’s Chancellor Merkel said “I will not allow Germany to participate in any speculation.”  ie : Germany will not promise to offer financial support to those insolvent countries in the eurozone.

Merkel’s announcement caused traders to sell the EUR moving the situation within the Euro Zone from bad to worse. Investors are worried about the financial soundness of several Euro Zone countries including Greece and Ireland and Eastern Europe countries like Hungary and Ukraine. As a result the EUR is declining. Towards 07.00 GMT this morning the EUR stood at 1.2594 USD a fall form 1.2673 USD overnight. Against the JPY, the EUR fell to 118.56 from 119.35 overnight.

Several Central European currencies have experienced a sharp decline in recent weeks because of concerns about the status of the banks in these countries and fears of massive capital withdrawals.The bleak outlook within the Euro Zone is exacerbated because despite these growing concerns, governments have not adopted any significant budgetary measures. There is a lack of clear policy direction which only reinforces concerns about the recession and weakens the EUR.Elsewhere : In the U.S. the dollar was supported by the rise in producer prices in January, increasing by 0.8% compared to December after five consecutive months of decline.

Faced with this situation, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and a subsidiary of the International Monetary Fund (IMF) have announced a plan to aid the financial systems of Eastern Europe. 

Towards 07.00 GMT this morning the GBP rose to 88.55 pence against the EUR but fell against the dollar to 1.4222.

The Swiss currency was stable against the EUR at 1.4878 CHF but fell against the dollar to 1.1813.

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• Wall Street at its lowest point in 6 years
• The EUR is rising
• High Volatility for the cable today

 

At the close of the markets on Friday evening Wall Street was at its lowest point in 6 years after losing 1.34% at the end of a a day which was full of the rumors that the U.S. government would decide to nationalize certain banks and even the expropriation of their shareholders.

 

For its part, the EUR rose sharply against the USD shortly before the close of U.S. markets on Friday. Indeed, before last week (in which the USD rose steeply), traders and investors preferred to take their profits. Their decisions were based on the speculation about the proposed nationalisation of some U.S. banks by the weekend. Thus the EUR, which was trading with below 1.2557 USD on Friday took over 400 pips this morning and has traded throughout this morning at about 1.2974 USD, close to the psychologically important threshold of 1.30.

As for the JPY – it has started this week with a sharp rise against the major currencies. There seems to be a return of a taste for risk taking appearing again on the markets. At 09.00 GMT, EUR/USD is trading at 120.76 compared with 119.15 JPY at the opening this morning. The USD/JPY, for its part, is stable at 93.16, compared with 93.21 at the opening this morning, after its sharp rise last week, which saw the cross take nearly 400 pips.

 

The GBP also rose against the USD this morning with a start of around 1.4566 – could this be the start of a move towards 1.47 barrier ?  For the moment the cable continues its upward phase and is currently testing the threshold of 1.4600. Although no major announcement is planned high volatility today is expected on this pair with an expected range of 1.4450 - 1.4750

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The week got off to a good start for the USD as it continued to climb against the JPY. However, later on Monday the dollar began to slow down against the EUR because of numerous speculations that were doing the rounds of the markets. The rumours concern the proposed nationalization circulating of part of the U.S. banking sector. These speculations and announcements, which are expected to continue throughout the week, could have a favourable effect for forex traders for the time being.

The rumours are not really a surprise. Indeed, influential economists, including Alan Greenspan (American economist and former Chairman of the federal Reserve)  and Nouriel Roubini (Professor of Economics at the Stern School of Business,  New York University  and chairman of RGE Monitor, an economic consultancy firm), have been calling for a temporary nationalization of banks affected by the crisis over the last few weeks. The names of Bank of America and Citigroup have been whispered for a few days. Both of these banks received a 45 billion dollar recapitalization package from the Federal Government.

The officers of the Bank of America have denied such the rumor, but not so the Citigroup executives. Analysts expect up to 40% of the Citigroup to be nationalized through the conversion of Ordinary shares to Preferred shares which will be held by the U.S. government. The U.S. Treasury has not yet confirmed the rumors, but the situation should be cleared up during the course of the week. It is expected that Tim Giethner will make a further announcement this week about the Obama bail-out plan – maybe he will take this opportunity to confirm or deny the bank nationalization rumours.

The speeches of Barack Obama and Ben Bernanke the Fed chairman will also be carefully monitored this week. Obama’s should unveil an ambitious plan aimed at halving the U.S deficit within four years while Bernanke’s will raise the question of quantitative flexibility which could have an impact on the USD exchange rate.

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“Severe global slump will persist for most of 2009″ this is  what  the finance ministers from the Group of Seven nations have said this weekend in Rome.

The Foerx market  reacted by opening the week with safe haven currencies gaining back some of last Friday’s losses.

EURUSD- fell almost instantly from its Friday close  1.2860, now testing its major support area around 1.275, if breached, the next support area should be the lowest low since the break out of the financial crisis 1.27  - mind you that a clear break under can possibly cause accelerated selling in a short period of time, as stop losses are usually being triggered around these levels, flooding the market with selling orders.

On the up side - breaking  and maintaining levels above this  week’s open 1.2860 could indicate the pair is ready to cross back to test 1.29 and on.

GBPUSD - has also opened much lower, now trading around its initial support level 1.4150, a clear break would most likely send it down to test its more important support at 1.4.

On the Upside, as with EURUSD, a first sign of recovery would be the ability of this pair to firmly trade above the opening level for the week  1.4355

Z.Georgi

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some bad news from Japan yesterday, an unprecedented slump in exports caused Japan’s economy to shrink by 3.3 percent  - marking the sharpest fall since the oil crisis back in 1974.

In the forex market, this was an additional fuel for safe haven currencies.

EURUSD - as I expected yesterday, the break under the support level 1.27 has triggered an almost instant sell off to 1.26.

The pair is still very bearish this morning, and might attempt to test  its next support area around 1.2554.

GBPUSD- at this moment the pair is reluctant to move any lower than 1.4150, but its is very likely to see 1.4 soon if the short term sentiment in the market will continue to support safe haven currencies.
Otherwise, a quick move back to 1.4350 might be in the cards.

Z.Georgi

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The EUR fell again against the USD yesterday, reaching the lowest level since 21 November. At about 16.15 yesterday it fell to 1.2513 USD. This was a result of concerns on the Forex about the impact on the Euro Zone of the difficulties of the Eastern European economies.

The severity of the problems being experienced by the Eastern Europe currencies has long reaching effects. The situation raises fears not only for the European financial sector but also for the potential increase in the depth of the recession in the Euro Zone. Some analysts speculate that the EUR could fall to under 1.20 USD in the medium term because the European Central Bank may be forced to reduce its interest rate to under 2% which in turn reduces the gap between the Euro Zone and the United States where the interest rate is already set to almost zero.

The European Commission expressed its concern about the volatility of the Eastern European currencies, many of which have fallen sharply. Since Monday the Hungarian forint, the Czech koruna, the Polish zloty and the Romanian leu have experienced severe volatility because of the concerns about the state of the banks in these countries and fears that there will be a large withdrawal of capital.

The banks of Western Europe are exposed by the state of their subsidiaries in Eastern Europe. The risk is that the markets will develope a vicious cycle while the economies of Eastern Europe adjust to their instability by recalling their funds from Western banks. It may be that France and Germany will have to support some countries in Central and Eastern Europe because of the extent of their exposure in the region.

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The Japanese Yen has lost its ground this week against the dollar as Japan suffers from the deepest contraction in decades and the public is losing its trust in  the current government  and its  Prime Minister Taro Aso.

USDJPY has advanced sharply up this week to meet its main resistance area (yesterday) around 94.
As expected, the pair failed its first attempt to break above 94, this level is the major resistance of USDJPY since October 2008.
This morning we are back to 93.5, with a possible second try to test the 94 level, and if indeed clearly breached,  it might take us to fresh new highs - possibly to the next resistance at 96.5 in the near future.
However, a failure to break 94 in due time, should stimulate traders to buy back the Yen, sending the pair lower to meet  the 90 - 92 range once more.

Z.Georgi

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Despite the continuing tendancy among traders towards risk aversion as a result of their disappointments related to the U.S. rescue plan, demand for the Swiss franc (CHF) has not been strong, this is contrary to what has happened in the past. In fact, the Swiss franc can not really lay claim to its former status as a ‘safe haven’(along with the USD anf the JPY) in the foreign exchange market because of the sharp deterioration of the Swiss economy. The Swiss economy is being severely affected by the economic crisis and there is a very strong and realistic threat of deflation hanging over it. The Swiss National Bank has begun to consider the use of what they call ‘quantitative easing measures’ to cope with the situation. The massive loss announced by the country’s largest bank, the Union Bank of Switzerland (UBS), during the fourth quarter of 2008, can not be attributed solely to the CHF – even though it weakened even more yesterday against the EUR and the USD.

Concerns about the economies of the euro zone have also increased this week. Particularly with reference to the high exposure of the EUR to the economic deterioration in Russia and the associated possibility of depressing the single currency. There has been a rumour circulating that internal debts of Russian companies with be ‘re-scheduled’ to Russian companies abroad adding to the threat to the EUR.

Finally, traders will closley watch this weekend’s G7 meeting in Rome, to which Russia has been invited. This meeting is expected to lead to a series of summits to be held in the coming weeks which will collectively address the global economic crisis and establish measures to regulate financial activity.

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The New York trading session yesterday was a positive one for stocks -  what stimulated the Forex market to react with the selling of safe haven currencies once more.

Now markets are preparing for the results of the G7 meeting in Rome scheduled this weekend.

It is very likely that many traders are currently choosing to unwind their positions ahead of this weekend and before the G7 helping to  reduce the demand for safe haven currencies on Friday.

EURUSD - yesterday was testing its lower support area at 1.2750. However, this morning is trading firmly back above 1.29.
The pair is trading in a range for the last two and a half weeks with no success of breaking above 1.3070 and below 1.273.

GBPUSD - failed to break clearly under its first support area 1.4150 yesterday, quickly turned to trade higher with some remarkable buying pressure. This morning the Pound  has already penetrated 1.45 and higher against the dollar. The next resistance area for the pair is projected around 1.47.

Z.Georgi

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The recent rally on the pound was eventually blocked this week when doubts  over the efficiency and clarity of the U.S rescue plan grow.

The Pound which was scratching the 1.5 level against the dollar two days ago, is now  heading towards the lower levels of 1.4.

In fact, the GBPUSD has now corrected 50% of its last up move by hitting lower than 1.4260

First support area for GBPUSD is at 1.4157, but the real barrier is of course 1.4.
If any buyers are waiting for the Pound, it is likely to assume they are waiting around that area.

Generally, the risk aversion cycle is well in control over the market, however,  Pay attention to today’s economic reports : Euro-zone industrial production at 10:00 GMT, US Retail Sales and Employment claims at 13:30 GMT,  these may affect the current environment.

Z.Georgi

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