Currency markets – Event risks are rising

EUR/USD (1,2800): The very serious risks are now getting more clear for market participants. The discussion about the survival of the Euro that I touched briefly last week will grow. But the discussion itself will not lead to the Euro blow up, that will economic realities take care of later on.

2 event-like situations will soon take very much attention, they are working in opposite directions so it’s important to judge the timing. The implications of the Central and Eastern European severe economic downturn, and their totally foreign debt overloaded private sectors becomes reality this year.

The other risk I have mentioned a couple of times, is the appetite for US Treasuries, or more correct the missing appetite for those papers one day. No doubt that Fed will be forced to intervene soon, that action alone will hurt the greenback. This could happen within a couple of months. The long term effect comes when investors don’t reinvest in US Treasuries.

Near term, including this week, the Central and Eastern European worry will pressure the Euro, though not start a new trend. I lower this weeks range to 1,2550 – 1,3050 from 1,2750 – 1,3250. Some numbers during the week, where Philly Fed on Thursday (exp. -25,0) might move the Dollar a bit.

Not to scare anyone, but our friends were on different wires saying the following:

Mr. Trichet said “We have to prepare for exceptional situations, I would not exclude anything or pre commit to anything”.

Mr. Bean from Bank of England said “Global economy in sharp, synchronized downturn”.

Mr. Almunia form the EU Commission said “Economic situation is difficult, countries starting to suffer social tension”.

As mentioned, it is not to scare, but more underline the humble view that serious risk management and clear views on the market based on insight and experience is needed – fairly difficult, but possible to be honest.

We can’t hide from risk, but be well prepared to handle it.

Target: Range 1,2750 – 1,3250.

  
EUR/GBP (0,8955) – GBP/USD (1,4310): Very brief on Sterling. EUR/GBP jumped to 0,9000 last week after Mr. Kings speech. I didn’t thought that the report would have that impact on the market to be honest.

I keep the targets as the report from Bank of England just shows how bad it is in UK – lower Sterling.

Targets: EUR/GBP 0,9000 followed by 0,9500     GBP/USD range 1,3750 – 1,4250 .

EUR/JPY (117,40) – USD/JPY (91,60): Also fairly short on Yen as capital flows still decide everything regardless of how bad fundamental economic data we get. The Q4 GDP number from Monday morning showed how difficult the situation is (worse than expected). More will come out this week where the Bank of Japan policy meeting Thursday is the most important. Same rate of course but they always comment afterwards.

I keep the targets as I expect equities to remain under pressure.

Targets: EUR/JPY range 114,00 – 120,00  USD/JPY 88,00. Expect intervention.

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