EUR/USD
The Euro was unable to make headway ahead of the US open on Friday and dipped to support levels in the 1.3220 area as fear remained the dominant influence. There was another very weak auction of Italian debt with the yield on six-month bonds pushed very sharply higher to 6.95%. There were also sharp increases in yields across all maturities with 5-year yields above 7.5%.
There was very poor liquidity in the bond market with very high spreads and choppy trading was also a feature in the currency market. The Euro rallied back to the 1.33 area before being undermined again by a credit-rating downgrade for Belgium by Standard & Poor’s.
Money-market tensions remained extremely high with a further increase in Libor rates while underlying indicators of market stresses remained at their highest level since 2008. There were still reports of a hard-line stance by the German government and ECB resistance to larger-scale bond purchases while demands for much tougher debt relief by Greece continued to unsettle markets
There were reports of firm US retail sales for ‘Black Friday’ which helped maintain a slightly more optimistic tone surrounding the economic outlook which also underpinned confidence.
Over the weekend, there were a high number of rumours and reports of potential action. There was a release of draft EFSF rules which are set to be agreed at this week’s Euro-group meetings. There were plans to boost the effective firepower to EUR1trn, but adverse market conditions and weak demand for bonds makes this highly unlikely.
There were also reports that the IMF was preparing a EUR600bn rescue package for Spain and Italy using its new lending facility launched earlier this month. This speculation triggered an important shift to sentiment in Asian trading on Monday with the Euro moving back above the 1.33 level as defensive dollar demand weakened. The Euro peaked around 1.3340 before dipping again as IMF reports were denied.
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Yen
The dollar maintained a generally firm tone against the yen on Friday and pushed to highs around 77.70 before hitting some profit taking. There was evidence of greater investor interest in selling the Japanese currency with the currency gaining some support from optimism surrounding US retail spending.
Speculation over a possible IMF support package for Italy and Spain had an important impact in boosting risk appetite on Monday and this undermined defensive demand for the Japanese currency as the yen also tended to weaken on the crosses.
There will still be a high degree of caution over selling the yen aggressively, especially given the very high degree of uncertainty surrounding the Euro-zone and global economy.
Sterling
Sterling hit selling pressure near 1.55 against the dollar on Friday and retreated to lows below support in the 1.5440 area before moving higher again in Asian trading on Monday.
The UK currency was still gaining some degree of net support on defensive grounds as market confidence in the Euro-zone continued to deteriorate as bond yields continued to increase.
There were still very important reservations surrounding the UK economic outlook with Bank of England officials continuing to take a very open stance in suggesting that further quantitative easing was likely within the next few months, particularly given the deterioration in Euro-zone demand conditions.
The government looks likely to announce increased infrastructure spending in the Autumn statement on Tuesday, but the revised growth forecasts could dominate market talk and a sharp downgrading of forecast would undermine confidence. Governor King’s Monday testimony on the inflation report will be important.
Swiss franc
The Euro found support on dips to below 1.2250 against the franc on Friday and rallied firmly during the US session with a peak above 1.2350. There were market rumours that the National Bank was set to make a fresh policy announcement with inevitable speculation that this would involve a higher minimum Euro level against the Swiss currency.
There was no statement, but central bank members continued to warn that it was ready to take further action if necessary. The US dollar hit a peak in the 0.9320 area against the franc, the highest level since late March, before edging lower again in Asia on Monday.
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Australian dollar
The Australian dollar continued to be dominated by risk conditions during Friday and rallied from lows below the 0.97 level against the US currency. There was a further spike in buying support at the Asian open on Monday with a push to highs in the 0.9850 area as risk appetite improved again following reports that the IMF would announce a support package for Spain and Italy.
There was some optimism over the US economy which also helped underpin risk appetite, but there was still a high degree of uncertainty surrounding the Asian outlook which maintained underlying caution surrounding commodity prices and the Australian currency.
