It was a promising start of the week with currencies trading all over the place and in different directions on the back of varying market drivers. The Euro and the sterling jumped out to some early gains on Monday with the weekend news of an EU and IMF bailout for Ireland of some Eur80-90B helping to bolster sentiment in the region.
The loser of the session was the NZD, which fell dramatically upon the unexpected news from S&P who have downgraded the currency’s rating from ’stable’ to ‘negative’ citing weakness in the resilience to foreign debt issues.
The Irish bailout triggered risk rally is rather short lived as market reversed during the London session after Mood's Investors Service warned that it may have multi-notch downgrade for Ireland. Moody's said in a note that the rescue package from EU/IMF would "crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign's debt burden". Previously, Moody's put Ireland on review and said it would likely cut the grade by one level. However, the increase in state debt would now exceed original expectations and a multi-notch downgrade" is "now the most likely outcome."
By Tuesday, risk sentiment deteriorated further amid euro zone debt concerns and geopolitical turmoil in Asia.
There are reports of North Korea firing the shells into South Korea that caused military, and even rumored to be civilian, casualties.
A high degree of risk aversion from continued widening of Irish, Portuguese, Greece, and most importantly Spanish Yields against the benchmark German yield is driving sentiment.
A very thin and volatile pre-Thanks giving on Wednesday and Thursday’s dead zone better known as Thanksgiving weekend. A market which is already horribly thin on the ground for liquidity as holiday in the U.S. results in reduced trading flows.
A relatively quiet day for data releases post the Thanksgiving holiday leaves markets more susceptible to events unfolding in the eurozone. Growing skepticism around both Greece and Ireland's future economic growth prospects, and the feasibility of projected deficit reduction programs this week, continues to drive fears of contagion amongst other periphery countries such as Portugal and Spain. While many questions remain around the form of Ireland's assistance, in particular the role investors will play in sharing the burden of any bailout, it is now becoming clear that withdrawal of ECB support to the eurozone banking system is less likely over the short term. The Spanish/German 10-year bond premium was at fresh record level over 255bps. The outright Spain 10-year yield tested 5.25%, which was wider by over 50bps in session (highest level since 2002).
The conflict on the Korean peninsula continued to escalate as North Korea considered declaring war against its southern neighbor due to arranged military drills with the US. There were later reports of artillery fired by North Korea, though it appeared to be part of military drills as it was contained within the northern borders.
The British pound has performed well against the euro. However, against the dollar and yen, we see the currency align itself in the risk scheme. With heavy exposure to Ireland, the UK is leveraging the weight already set by its own austerity measures. The GBP/USD has been slowly declining, but was not showing a bearish signal, until this week. This week, the Sterling finally gave way to the USD.
GBP/USD inability find support at 1.60 handle this week displayed marked bearishness that started on November 4th. The pair broke down major support at 1.5650 by the end of the week. This drop has established a fresh one-month low for the pair and has given indication of a potential breakdown of the uptrend that has prevailed since the May lows. Further bearishness off the current support breakdown in the approach to December and the New Year is a distinct possibility.
For the coming, the bearish tone is expected to continue with resistance at 1.5675 and support at 1.54 handle.
