On Friday, some calm remained in the EUR/USD cross rate following huge losses for the euro on Monday/Tuesday, when the solo slim of Greek PM Papandreou pushed the euro sharply lower. In a daily perspective, EUR/USD closed at 1.3791 versus a previous closure at 1.3759. All in all, we still see this euro performance as not too bad given the batch of often unsettling news that had to be digested. The euro area still didn’t find a credible way to end the raging euro debt crisis. The downside in the cross is rumoured to be protected by Asian buying interest.

Intra-day, the EUR/USD cross hovered listless in a tight range during the European morning session as traders and investors were sidelined ahead of the G20 conclusions, the Greek confidence vote and the US payrolls. In the afternoon, Ms. Merkel said that the G20 failed to agree on boosting IMF resources and that few countries showed interest to participate in EFSF (eventually indirect). On this headline, EUR/USD made a (small) step downward, in lockstep with equities (while core bonds went up). The US payrolls report was decent (see news section), but an initial spike higher was not met with follow-up buying, convincing traders to sell the euro again and the EUR/USD slid to an intra-day low of 1.37 from an intra-day high of 1.3872 in a matter of two and a half hour. Later on, US equities started to climb higher in a slow fashion, allowing EUR/USD to mirror the move which ultimately brought the pair back to 1.3791. In fact, the consolidation period that started on Wednesday was prolonged. The Greek vote was still hanging and investors were unwilling to take position ahead of yet another crucial week.

In Asia, overnight, the pair is under some modest downward pressure, trading at 1.3770 at the time of writing. In the weekend, the Greek Pasok and the Conservatives parties reached an agreement on the formation of a government of National Unity. However, crucial elements like the name of the new PM are still to be discussed. Elections would most likely be held on February 19. The new government should also specify its programme until the elections. Of course, it is likely that before the elections, the implementation of the austerity package will be difficult. So, while the developments over the weekend are intrinsically positive for Europe and risk, investors won’t consider them as key progress. Attention turns to Italy, where the yield spread and nominal rates are at their highest since the crisis started. According to a Sunday newspaper, ECB’s Mersch, admittedly a hawk, said that the ECB frequently debates the option of ending its purchases of Italian bonds, unless Rome delivers on reforms. The Berlusconi government is a dead man walking and faces tomorrow again a confidence vote. So, markets seriously take into account that the crisis may be prolonged along this avenue, while at the same time also the EFSF leveraging is still work in progress on which the Eurogroup will debate this evening. To complete the calendar of events, no US data, but EMU retail sales and German production risk bringing more evidence of the rapid march down of the European economy, which isn’t euro positive. More positively, the French government will announce some austerity measures following its downgrade of 2012 GDP growth to 1% from 1.75% previously. So, for today, investors probably will stay in a wait-and-see mode.

Looking at the technical picture, early last week, the pair had regained the ‘old’ sideways trading pattern roughly between 1.40 and 1.4550. This improved temporary the technical picture in this cross rate. However, the Japanese interventions and the announcement of the Greek PM again overthrew this improvement. The 1.3655 area was the first important support on the technical charts. This area was extensively tested on Tuesday and Wednesday, but no sustained break occurred, while it allowed the euro to gain a bit. Nevertheless, no sustained and technically-relevant rebound of the single currency is likely, as long as uncertainty about the euro crisis remains so large. So, we changed our short-term bias for EUR/USD from neutral (range trading in the old range) again to negative and we look to sell into strength. An eventual break below the 1.3655/08 area might reaccelerate the sell-off. A sustained re-break north of 1.40 would improve the technical picture.

On Friday, USD/JPY hovered sideways at first in a tight range with 78 the bottom boundary. Later on, the dollar gained some ticks, leaving the pair at 78.24 in the close, a daily gain of 16 ticks. It trades now slightly lower at 78.17. There was little news or eco data behind the moves. Since the BOJ’s massive interventions of last Monday, the pair seems to have slid again in an uneventful sideways trading range. Of course, the market is worried about more interventions and market talk is that the BOJ intervened in small amounts last week to prevent a renewed rise of the yen. The level of 78 is put forward as the line the BOJ might be defending. A look at the graph shows why this level is rumoured to have significance in the BOJ FX policy.

The G20 made some minor observations on FX as it said to move rapidly towards market-determined currencies and in an appendix welcomed China’s determination to increase yuan flexibility. We will go with a comb through the G-20 conclusions later today, but it looks to have be disappointed and not only on the euro debt crisis.

During most of the summer, USD/JPY was under pressure mirroring global dollar weakness while the yen continued to ‘enjoy’ an ongoing safe haven bid. The BOJ made clear that it stood ready to step in the market in case of further yen gains, which effectively occurred on Monday. Will it really be able to change the course of events in a fundamental way? We don’t see a trigger to change the current framework for USD/JPY trading. In September/early October, the dollar was temporary in better shape even as US monetary policy suggests ongoing global dollar weakness. However, this broader dollar rebound was hardly visible in the USD/JPY cross rate. Any upticks soon met selling interest. We don’t see much room for a sustained rebound of USD/JPY, except when it might get additional support from the BOJ.

On Friday, EUR/GBP showed some intra-day volatility, but closed in the end at 0.86017, marginally below the previous close. Just like for EUR/USD, the EUR/GBP cross was largely in consolidation mode following a steep decline last Monday. This decline confirmed the failure of the pair to leave its sideways trading range. Contrary to EUR/USD, EUR/GBP is at the bottom of a sideways range. EUR/USD is still more on the upper side of a similar range. Currently, the euro is under some downward pressure and so EUR/GBP changes hands at 0.85726. For today, the 0.8531 range bottom may come under test, but only if the news flow on the euro debt crisis would become very negative. With a Eurogroup meeting planned this is not our favored scenario. However, comments of ECB Mersch on the ECB debating stopping buying Italian debt in case the country doesn’t fulfill its promises bears watching at the start of bond trading.

Global picture. In August/September the EMU debt crisis came again to the forefront. In addition, at the September meeting, the ECB put the normalization process of its policy rate on hold and even a rate cut is again possible. This changed, at least temporary, the balance between the euro and sterling. EUR/GBP dropped (temporary) below the key 0.8611 range bottom. Euro skepticism, at least temporary, outweighed uncertainty on more UK QE. Still, the downside pressure in EUR/GBP remained much more contained compared to the potential losses in EUR/USD in case the EMU debt crisis would worsen. In this context, we favored a scenario of EUR/GBP holding the sideways trading pattern between 0.8531 and 0.8800. The bottom was under heavy pressure early October but the test was rejected. The October BoE decision to raise the amount of asset purchases pushed EUR/GBP again higher in the established trading range. A broader rebound of the euro in the run-up to the EU summit triggered further gains in EUR/GBP too. The pair tested the key 0.8795 neckline early last week, but the test was rejected. The announcement of a Greek referendum also triggered a major setback in this cross rate. However, the 0.8531 range bottom was not challenged yet. Uncertainty remains extremely high, but for now we assume that the range bottom will hold.

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