| New mood or false dawn? |
| 20.01.12 12:14 | |
|
Positive Eurozone debt auctions, better US data, a strong January for stock markets and hopes that Greece will avoid a messy default in March are all contributing to the current ‘risk on’ sentiment in markets. In fx, the present of extreme EUR shorts has undoubtedly fed the turnaround in EUR crosses this week. While there is plenty of talk of a new mood emerging in markets, there is every risk of this optimism will prove to be a false dawn. The ECB’s LTRO is clearly having the desired effect of supporting sentiment in markets. There is reason, however, to question how long this effect will last. If banks are loading up on paper to use it as collateral at the February LTRO then debt auction subsequent to February may see less support. It is up to politicians to make the most of the better tone in markets that the ECB has afforded then but there has been little changed in the Eurozone political backdrop since the end of last year. Hope are riding high that next week’s summit will bring positive developments, but there is clear risk that the politicians will again disappoint. Clearly a PSI agreement in Greece will bring fresh relief as this would imply that Greece could avoid a messy default in March. However, there are many other hurdles that may need to be overcome by EMU this year. Despite reassurances from politicians that haircuts for Greece were a special case, rumours that Portugal may be next to demand debt forgiveness will not lie down. Recessionary conditions threaten to feed these fears this year. If talk of Portuguese haircuts gather pace so will speculation that Ireland may also follow this route. There is every risk therefore that contagion could return with a vengeance in the coming months. It is against this backdrop that the first round of Finland’s presidential elections will be held this week. Polls are highlighting the electorate’s increasing distaste with Eurozone bailouts and even the EU as a whole. If remains the fact that the sovereign debt crisis in the Eurozone has a long way to run. Even so, optimists will point out that the recovery in the US is a strong antidote to the bad news stemming from the Eurozone. There is truth in this. However, the US is running a budget deficit around 9% of GDP. Automatic fiscal stabilisers will be triggered in 2013 meaning that the headwinds of austerity can be expected to keep a cap on growth potential in the US also over the medium-term. The optimism that is currently lifting US stocks markets may be triggered before the month is out if earnings fail to deliver. Against this backdrop we maintain our view that EUR/USD is likely see USD1.2500 on a 3 mth view. The technical picture for EUR/USD, however, has improved with the break above the 21 day sma at 1.2874 and the move about the daily tankan line suggesting a more buoyant outlook for EUR/USD near-term. The better tone will relieve oversold conditions but this could be set conditions for another move lower in the weeks ahead. Consequently we would be looking to sell EUR/USD on rallies. source: Rabobank |
| < Prev | Next > |
|---|