Forex Trading :- Euro, Sterling Correction To Gather Pace On Increased Fears

Talking Points
Euro: ECB Holds Cautious Tone, Sees Risk Of Economic Contraction
British Pound: BoE Talks Up Speculation For More QE, Correction To Accelerate
U.S. Dollar: Benefits From Risk Aversion, Rebound To Gather Pace
Euro: ECB Holds Cautious Tone, Sees Risk Of Economic Contraction


The European Central Bank’s struck a cautious outlook in its monthly report and reiterated that the economic outlook remains tilted to the ‘downside’ as the region faces a slowing recovery. At the same time, ECB board member Jozef Makuch highlighted an increased risk of a double-dip recession, noting that the economy may contract over the medium-term should ‘downside risks materialize.


In addition, the EU warned that some commercial banks may need a 9 percent capital buffer to weather the ongoing turmoil within the financial markets, and we may see the ECB take additional steps to shore up the ailing economy as it aims to encourage a sustainable recovery. According to Credit Suisse overnight index swaps, market participants still see the Governing Council scaling back the benchmark interest rate from 1.50 percent over the next 12-months, and the committee may carry its easing cycle into the following year as the outlook for growth and inflation deteriorate. As the near-term rally in the EUR/USD tapers off ahead of the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-1.3900, the pullback from 1.3832 may gather pace over the remainder of the week, and the single-currency is likely to face additional headwinds over the near-term as European policy makers struggle to restore investor confidence. In turn, the near-term forecast for the Euro remains bearish, and the euro-dollar may threaten the rebound from 1.3145 as the fundamental outlook for the region deteriorates.


British Pound: BoE Talks Up Speculation For More QE, Correction To Accelerate


The British Pound struggled to hold its ground on Thursday as the Bank of England talked up speculation for additional monetary support, and the sterling may trade heavy over the coming days as the central bank maintains a highly dovish outlook for future policy. BoE board member Charles Bean said the central bank may ‘undertake further purchases’ as the region faces an increased risk of falling back into a recession, and went onto say that the European debt crisis risks could ‘lead to a seizing up of the financial system’ according to an interview with the Guardian newspaper. As the MPC steps up its effort to shield the U.K. economy, we may see a growing argument to expand the asset purchase program beyond the GBP 275B target, and speculation for further easing is likely to weigh on the exchange rate as market participants weigh the outlook for monetary policy. In turn, the GBP/USD may trade heavy ahead of the BoE minutes on tap for the following week, but the exchange rate may give back the rebound from 1.5273 should the central bank keep the door open to expand policy further.


U.S. Dollar: Benefits From Risk Aversion, Rebound To Gather Pace


The greenback gained ground following the shift in market sentiment, and the reserve currency may continue recoup the losses from earlier this week as it benefits from safe-haven flows. As the U.S. stock market opens lower, we should see risk aversion gather pace throughout the North American trade, and risk trends are likely to heavily influence price action for the major currencies as the economic docket remains fairly light for Thursday. As global policy makers continue to cast a dour outlook for global growth, the shift away from risk-taking behavior should gather pace over the remainder of the week, and the greenback may resume the upward trend from the previous month as the fundamental outlook for the global economy deteriorates.

The Reserve Bank of India (RBI) has opposed the creation of a $20 billion sovereign wealth fund, for acquisition of energy assets overseas, out of foreign exchange reserves and wants the government to create the corpus for it from the Budget.

A Group of Ministers headed by Finance Minister Pranab Mukherjee on Thursday deliberated on the possible ways of creating a fund on the lines of ones that exist in countries like China.

“Various things were discussed but no view has emerged,” Oil Minister S. Jaipal Reddy said after the 75-minute meeting.

Sources privy to the deliberations said the RBI was against using the nation’s forex reserves for setting up the fund. So, the Planning Commission has been asked to work out surplus that may be generated after accounting for all Plan and non-Plan expenditure.

“What they are talking is $1-2 billion corpus which is hardly the size...for acquisitions of oil and gas fields or coal and other mineral mines,” a source said.

“We decided we will take a look at it after the (12th Five Year) Plan approach paper is approved,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.

Asked if RBI agreed for sharing a part of the over $300 billion forex reserves, he said: “Those are some of the issues. I mean one view is that it could be done through use of forex reserve. There are some operational problems there. The other view is that if you do it out of budgetary resources.”

He added, “...obviously if you use budgetary resources then you are taking from other use of plan fund. That’s what we have to look at.”

From - thehindu.com

Euro Weighed By Debt Fears, All Eyes on EFSF Vote

Fears surrounding the sovereign debt crisis resurfaced on Tuesday as European Central Bank President Jean-Claude Trichet held a cautious outlook for the region, and the shift away from risk-taking behavior may gather pace throughout the North American trade as European policy makers struggle to restore investor confidence. 
Talking Points
Euro: Greece To Receive Next Payment In November, All Eyes On Slovakia
British Pound: Halts Two-Day Rally, Sideways Price Action Ahead
Euro: Greece To Receive Next Payment In November, All Eyes On Slovakia
The Euro fell back from an overnight high of 1.3671 as European Central Bank President Jean-Claude Trichet talked up the risk for contagion and warned that the debt crisis has reached ‘systemic dimension.’ Moreover, Mr. Trichet encouraged the EU to act swiftly in recapitalizing the European banking system and stressed the importance of increasing the flexibility of the European Financial Stability Facility as the fundamental outlook for the euro-area turns increasingly bleak.
The EU, International Monetary Fund and the European Central Bank said Greece will receive its next bailout payment in early November after completing its fifth review of the economy, but warned that the 2011 fiscal target is no longer within reach, which will put increased pressures on the government to take additional budget-cutting measures in 2013-14. Nevertheless, all eyes are on Slovakia as lawmakers are scheduled to vote on broadening the powers of the EFSF, and the outcome is likely to sway market sentiment as European policy makers step up their efforts to address the debt crisis. However, it seems as though the EUR/USD has carved out a short-term top just below 1.3700, and the single-currency may consolidate over the near-term as market participants still see the ECB scaling back the benchmark interest rate from 1.50%. Bets for lower borrowing costs continues to dampen the outlook for the single-currency, and the euro-dollar may threaten the rebound from 1.3145 as the ongoing turmoil in Europe bears down on investor confidence.
British Pound: Halts Two-Day Rally, Sideways Price Action Ahead
The British Pound slipped to an overnight low of 1.5611 as market participants scaled back their appetite for risk, and the GBP/USD looks poised to face range-bound price action over the near-term as investors weigh the prospects for future policy. Indeed, the Bank of England stepped up its effort to shore up the ailing economy and increased its asset purchase program to GBP 275B, but the slowing recovery in the U.K. may lead the central bank to expand monetary policy further as the region faces an increased risk of a double-dip recession. With the BoE minutes on tap for the following week, it seems as though the pound-dollar will trend sideways over the coming days, and the slew of economic event risk scheduled for the rest of the week may lead the GBP/USD to give back the rebound from 1.5273 as the fundamental outlook for Britain deteriorates. In turn, the MPC may keep the door open to expand monetary policy further, and the central bank may carry its easing cycle into the following year in an effort to encourage a sustainable recovery.

GLOBAL FOREX: Euro Surges After German-French Summit

The promise of a comprehensive plan to stem Europe's debt turmoil helped propel the euro to its largest one-day surge against the dollar since July 2010 Monday, as investors anticipated that the global economy might escape the fallout of a potential default or restructuring by Greece.

Over the weekend, Germany and France pledged to present a "comprehensive package" of measures designed to buttress the euro zone's banking sector and fortify the Continent's bailout mechanism, the European Financial Stability Facility, by the end of October. Although details were scant from the Franco-German meeting, markets across the world leapt on expectations that the end of the long-running debt saga might finally be at hand.

As investors piled back into stocks and higher-returning currencies, safe-haven demand for the dollar evaporated and sent the euro on a surge of more than 3.5 cents on the day. That represented a stark turnabout from last week, when the euro tumbled to an eight month low at $1.3145.

"Euro selling has been pretty relentless since last week," said David Gilmore, partner and analyst at FX Analytics. He noted that gloom about Europe had become "extreme", so the bilateral French-German summit gave investors an opportunity to reduce bets the euro would fall further.

"Price over time can shape the narrative, so it all bears watching," he added. "If [the euro] gets back above $1.40 people won't be so pessimistic."

The single currency pared some of its gains after political wrangling in Slovakia heightened the possibility that the governing party may reject the EFSF. According to established rules, all 17 nations which use the euro must ratify the bailout fund.

Late Monday, the euro was at $1.3637 from $1.3380 late Friday, according to EBS via CQG. The dollar was at Y76.70 from Y76.76, while the euro was at Y104.60 from Y102.85. The U.K. pound was at $1.5671 from $1.5561. The dollar was at CHF0.9038 from CHF0.9271.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 77.567 from about 78.726. Meanwhile, the Australian dollar breached parity with the greenback for the first time since Sept. 22.

Risks to the market's budding optimism are still vulnerable to political realities in Europe. A European Union summit was postponed from Oct. 17-18 to the 23rd, underscoring how divisions among euro zone politicians are making it difficult to find a solution to what ails the Continent.

Analysts say that the longer the uncertainty persists, the more intense the risks are to a global economy already suffering from weaker growth and a near-incalculable overhang of debt. A default by Greece could echo across Europe's banking sector and the global economy. It also carries with it the possibility of sending the borrowing costs of Italy and Spain, the euro zone's third and fourth largest economies, soaring to unsustainable levels.

"For now, the markets are rallying on the belief that there is forward moment on dealing with the European bank crisis," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago. "To me, this is an exercise in placing funding sand bags around the global banks to ensure they are not flooded by the rising river level of a Greek default."

FOREX-Euro falls on caution before Slovak EFSF vote

 Slovak coalition remains split on EFSF vote


* But positioning may lead to further short squeeze


- The euro dipped on Tuesday on caution over a Slovak vote on changes to the euro zone's rescue fund but held in positive territory for the week as hopes for a solution to the debt crisis triggered a squeeze of short positions in the currency.


The Slovak ruling coalition remained split over a deal to broaden the EFSF and any delay in passing the legislation could dent sentiment towards the euro.


"The general view is 'by hook or by crook the Slovaks will get this deal through', though they may have to rely on the opposition to so," said ING currency strategist Tom Levinson.


Slovakia is the last of the euro zone's 17 members still to ratify changes to the 440-billion-euro European Financial Stability Facility.


The euro was down 0.3 percent on the day at $1.3600, but it stayed well above last week's low around $1.3145. It surged 2 percent on Monday for its biggest daily percentage gain in 15 months, hitting $1.3698.


Monday's rally followed a Franco-German pledge to do what was necessary to shore up banks, settle the Greek crisis and accelerate euro zone economic coordination.


This prompted investors to take profit on hefty short euro positions that had built up, and analysts said there was still scope for further short covering to lift the euro.


"At least for the moment the case to continue selling the euro has disappeared," said Richard Falkenhall, currency strategist at SEB in Stockholm.


SEB forecasts the euro at $1.38 within a month, but Falkenhall said gains would be gradual, with any rise likely to encounter some profit-taking.


Data from the U.S. Commodity Futures Trading Commission showed currency speculators increased their net short positions in the euro to 82,697 contracts in the week ended Oct. 4, the biggest in four months.


"The euro can go higher because short positioning is still extreme. Monday's rally only partially offset that position." said Manuel Oliveri, currency strategist at UBS in Zurich.


Traders cited decent bids for the euro from $1.3570 down to $1.3550, which could help cap its falls.


However, major resistance was seen at $1.3680-90, the 38.2 percent Fibonacci retracement of the $1.4550/$1.3145 move and the Sept. 28 high. Traders reported offers around $1.3670 and more ahead of a $1.3700 option barrier.


LASTING RALLY UNLIKELY


A lasting euro rally was seen unlikely, however, with uncertainty over EU policymakers' plans to recapitalise banks, in the face of expectations that Greece could default, keeping investors wary.


Risk-reversals, a measure of the premium required to hold bets on a currency falling or rising, showed investors still hedging against a weaker euro. The one-month 25-delta risk-reversal traded around 2.55 in favour of euro puts, compared to 2.80 at the end of last week.


Among growth-linked and perceived higher risk currencies, the Australian dollar fell 0.35 percent to $0.9951 , giving back some gains after climbing 2.4 percent on Monday, its biggest one-day rally since June 2010.


The Aussie faces stiff resistance at $1.0035 -- a 38.2 percent retracement of its slide from a $1.1081 high in late July to a $0.9388 low plumbed in early October.


The U.S. dollar was down 0.7 percent against the Swiss franc to 0.9097 francs after falling more than 2 percent on Monday when the U.S. currency came under heavy selling pressure as equity markets rose and appetite for risk improved.


Against the yen, the dollar held steady at 76.63 yen , not far from a record low around 75.94 struck in August.