Risk aversion is in vogue

The greenback surged broadly across board during the week as risks sell-off intensified with renewed debt worries in the eurozone. Greece CDS hit record high 3238 bp last week on concerns that Greece was unable to meet the terms of  bailout and this reignited fears about potential default and contagion to other peripheral states – Italy and Spain. The sudden resignation of Jurgen Stark from ECB board spooked investors further as it exposed the growing rift among the European leaders over the handling of the periphery debt. Stark has so far been known as a strong opponent to the endless buying of the peripheral bonds. Worries that the leaders are unable to contain the crisis has now set creditors restless as Finland is demanding collateral from Greece in return for fresh aid.

After data showed that unemployment remained doggedly high at 9.1% and NFP for Aug showed no new jobs creation,  Barack Obama unveiled a U$449bn job stimulus package on Thursday which included tax cuts and tax credits among other things. However, this failed to inspire hope. Bernanke’s speech was mostly an extension of the last Jackson Hole’s and continued to reinforce a gloomy economic outlook. The watchlist now is the Fed policy meeting on 20/21 Sep.

In Asia, China’s headline CPI moderated to +6.2% y/y in August from +6.5% in the prior month. But it’s still too early to say inflation has peaked and that China will soon abandon its tightening policy or resort to easing.

EUR/USD: The pairing has managed to stay afloat 1.40 for most of this year except for the occasional temporary dips. This support has come mainly from expectations of ECB rate hikes down the road. However, at ECB meeting last Thursday, Jean-Claude Trichet said “downside risks” to the region’s economy have intensified, and left the benchmark rate unchanged at 1.5%.  From previous hawkish to the now dovish tone, investors are now thinking that easing policy may soon follow suit and EUR is thus losing its carry appeal. Coupled with deepening worries in the eurozone debts, EUR/USD dived from 1.419 at start of the week to 1.3662 as the week closed, making it the 2^nd worst performing currency for the week after the swiss franc. This was the second consecutive week the common currency has fallen, and it chalked up 5.84% loss against the dollar during the last 2 weeks. Current developments at present look set for an acceleration in EUR downfall.


USD/CHF:After lower than expected CPI data, SNB announced on Tuesday a floor rate of EUR/CHF  at 1.2 and pledged to maintain this rate with "utmost determination". In addition, it warned that this rate is still high and if needed, will introduce further measures. CHF tumbled 9.48% against USD overnight (definitely a noteworthy stress scenario). As mentioned in my earlier post "CHF to peg?" , the desperate SNB is capable of doing anything, albeit at very high costs, to stem swissy gains. The historic move by SNB has changed swissy from a safe haven to de facto riskie overnight as it now tracks euro closely. EUR/CHF peg looks credible for now and well noted by market, and USD/CHF seems poised for upward move to test psychological 0.9 should sentiments deteriorate.

 Technicals:

EUR/USD dropped sharply to a 6-mth low 1.3626 last week, with a strong break of 1.3888 support. Initial bias remains on the downside in the near term for 100% projection of 1.48982 to 1.39682 from 1.45319 at 1.36019. Break will path the way to 161.8% projection at 1.3027, close to 1.3 psychological level. On the upside, 1.38363 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited below 1.40 psychological resistance and bring fall resumption.

USD/CHF: Clear break of consolidation zone 0.8 suggests that reversal from 0.72063 low is firmly underway. Remain bullish on this pair. Near-term support at 0.88 and if this falls through, 0.85 is eyed. However, remember that EUR/CHF trajectory is the key.