Daily Forex Brief London: Thursday 2nd February 2012

Safe-haven stress

One of the more remarkable developments during January was the relatively strong performance of the traditional safe-haven currencies, principally the yen and Swiss franc. We wrote about this during the course of last month, but the Swissie is particularly under the spotlight, given the proximity of EUR/CHF to the 1.20 floor imposed by the SNB last September. The Swissie only needs to appreciate another 0.5% vs. the euro to reach the 1.20 level, so the market is becoming increasingly nervous of further intervention by the central bank. The remarkable thing is that this has come at a time when the euro has been subject to some fairly severe short-squeezes, a function of the stretched short positions which lie beneath (see comments below). Once positioning becomes more neutral on the euro the SNB is likely to have an even tougher time defending the line in the sand it has drawn. Bear in mind also that creating so much liquidity is not a costless exercise in terms of its impact on the domestic economy. At some point in the not too distant future things could get rather messy for the Swissie and for the SNB in particular.

Also in today's Daily Forex Brief:

• The ECB pressure on peripherals
• Seeking data justification
• A merciless euro short-squeez

Daily Forex Brief London: Wednesday February 1st 2012

Dollar still sliding on more Fed QE

After a relatively encouraging first month of the New Year, the dollar index has fallen by 3% since mid-January, in part due to the Fed's surprising endorsement of more quantitative easing. Last Friday's GDP numbers were remarkably weak, confirming the prognosis of a number of Fed officials who feel that the economy could do with some further assistance. In addition, the dollar has been sold as a counterpart to the sharp short-covering rally in the euro; recall that two weeks ago, euro shorts registered a record high. The EUR had another look above 1.32 yesterday but ran into heavy selling traffic once more. Of interest is that the likes of the pound and the Aussie have essentially been steady against the single currency since mid-January, confirming that this is mostly about the dollar. It could well be temporary weakness, especially if the economy shows some resilience again. Friday's January payrolls figures could re-shape this debate

Also in today's Daily Forex Brief:

• Chinese economy holds up in January
• Greece buffeted by new troika demands
• Portugal peers over the precipice
• The difficulties of lending to the IMF

Daily Forex Brief London: Thursday 26th January 2012

Ben warns more QE may be necessary

In a surprisingly (but also refreshingly) candid admission, Fed Chairman Bernanke declared last night that another round of quantitative easing may well be necessary to alleviate "high and persistent unemployment in an underperforming economy". With inflation still low and Europe a potential drag on the economy, the Fed Chairman clearly feels that more asset purchases are a risk worth taking if it helps the recovery become more self-sustaining. Also disconcerting was the fact that Fed officials lowered their growth expectations for this year, a shock for many who had become more confident in the outlook for the US economy. Despite recent pronouncements from various Fed officials suggesting that more QE may well be required, Bernanke's statement caught dollar longs completely unawares, with the dollar index down more than 1%. For the army of euro shorts, there was an even greater flurry of position-squaring, with the single currency soaring to 1.3125 after languishing under 1.2950 at the start of the New York session. Bernanke's dovish tone helped both stocks and bonds, with the S&P up 2% from the low for the day and the yield on five-year treasury notes falling to a record low of 0.76%. Big Ben did the gold bugs a huge favour as well – the price is above USD 1,710 this morning, up from USD 1,650 before his statement. QE is becoming the preferred tonic of choice for policy-makers – both the Fed and the MPC signalled their intentions to use it again yesterday.

Daily Forex Brief London: Monday 23rd January 2012

A big agenda for eurozone Finance Ministers

Today's meeting of eurozone finance ministers in Brussels has a very full agenda to consider. There is the latest draft of the fiscal compact to discuss (see below), a review of the progress made in the Greek debt talks, and a conversation on a draft for the European Stability Mechanism (ESM). The latter apparently includes collective action clauses, although any debt write-offs will need to comply with IMF standards. Germany and France are both keen to wrap up the ESM issue as soon as possible, although it can only take effect once it has been ratified by those countries representing 90% of its capital. It is unlikely that any of these issues will be fully resolved at this meeting, although some progress will be made. Interestingly, these days the single currency is setting less store in meetings such as these, in sharp contrast to those held in the final quarter of last year. After threatening 1.30 at one stage early on Friday, the euro drifted back to near 1.29.

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