London Session: EURUSD the stand out performer in a quiet session

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By Kathleen Brooks | November 23, 2012 12:14 AM EST

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EURUSD has managed to brush aside some dismal PMI readings for the Eurozone and continue its march higher. It is currently getting stuck at 1.2895, which is also the Kijun line on the cloud, and this has thwarted the bulls so far today. We said earlier this week that the bulls had the reigns of the euro, but weren't pressing on the accelerator - today they have decided to give this move some gas and EURUSD is up more than 1% so far this week.

Can euro gains last?

The move seems to be pre-empting Greece receiving its next tranche of bailout funds at the next EU finance ministers meeting on Monday. Eurozone officials dropped some big hints that the money would be released after a hefty two months of negotiations. But can this cross make its way to 1.30? We think that the next leg higher in EURUSD is going to be hard to achieve. Greece may have this tranche of bailout funds but its debt load remains unsustainable. It may have won an extra two years to get its debt to GDP ratio back down to 120%, but so far all that Eurozone officials have done is tinker with the technical details, they haven't addressed the real problems: how to get Greece's finances on a sustainable track and how to get the economy growing again. Its banks are bankrupt, there is no investment and unemployment is at depression-era levels, the future for Greece remains bleak, and we believe this could temper any rallies in EURUSD going forward.

Feeling it at the core

And now problems are spreading to the core. Although the French credit rating downgrade earlier this week was largely ignored by the markets, the French bond market included, the advance PMI readings for November made for bleak reading. The composite PMI picked up a touch to 45.8 from 45.7 in October, but this is still consistent with a decline in Euro-area GDP in Q4 of approx. 0.5%. The worrying thing is that the forward-looking indicators of the German and French surveys were also weak, which does not bode well for 2013. Tomorrow sees the release of the German IFO survey, which is expected to decline further this month. The markets have been sensitive to any German data misses of late, so if the IFO is extremely weak we may see the EURUSD sell off. Key support is 1.2805 - the 200-day sma, then 1.2750.

EURJPY adding to positive euro sentiment

EURUSD may also be getting a boost today from the continued strong performance of EURJPY, which is up more than 2.5% so far this week. We expect this cross to continue to be driven by Japanese political dynamics and the prospect of lots more monetary easing from the BOJ in the coming months as Japan's presumed next PM Shinzo Abe has called for a 2% inflation target (currently Japan is mired in deflation and prices are contracting at a 1% annual rate). It increasingly starting to look like a new paradigm for the yen, however, I am looking for a break of this year's high of 84.20 in USDJPY before making sweeping statements about a weaker yen for 2013.

No one will Gobble Cobble this Thanksgiving!

The US is out due to Thanksgiving. Cobbler and Gobbler are the luckiest turkeys in the land after receiving a reprieve from President Obama last night. The President demonstrated his Democratic credentials by choosing the turkeys to save from the butcher's knife via a Facebook poll. This year's lucky birds will join Liberty and Peace - last year's survivors at a farm in Virginia.

No clear handle on markets with US out

There is no unifying theme in the FX Market today.  The euro and the CHF are the strongest performers, while the Aussie, Cad, Kiwi and the US dollar are all weak. Not even strong Chinese economic data can help the Aussie today. It was knocked back after another attempt at 1.0400 earlier. It hasn't been able to break this level since early October, suggesting that the bulls have left the Aussie for now. Interestingly the Aussie is moving in the opposite of its rate spread with the US , which has widened recently and in the past this has been Aussie positive. One explanation for this is that people are using the Aussie, which has been profitable since the summer,  as a cash machine (a bit like what they do with Apple stock) and using it to jump on other trends like a weaker yen. We will be watching Aussie closely to see if the uptrend resumes into year-end.

Elsewhere, Brent crude oil is lower today after a ceasefire agreement between Israel and the Middle East; we think that the downside may be capped at $110 in the short-term until the markets are sure that the ceasefire is for real.

Australian-US rate spread and AUDUSD


Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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