Singapore dollar sits at $1.2772; risk-oriented currencies fall steadily against the greenback

The US dollar moved above the $1.27 resistance level against the local currency.

IG Markets Singapore said:

The pendulum has swung back in favour of the US dollar as it moved above the $1.27 resistance level against the Singapore dollar.

It currently sits at $1.2772, flirting with the $1.28 level it almost breached last week at the height of the recent scare of a Greek exit from the eurozone.

The Singapore dollar had been regaining some ground on the Greenback as investors calmed down over fears of a Greek exit and a subsequent eurozone meltdown.

Equities have rallied a little also as market sentiment improved, underpinned by pledges by world leaders to focus on growth.

But last night Greece’s former prime minister spoke of the real threat of Greece leaving the eurozone which spooked traders and led to cautious trading.

GFT meanwhile noted (for 22 May 2012 trading):

Investors dumped euros ahead of Wednesday’s European Union summit. After rallying for 2 consecutive trading days, the euro failed to sustain its gains which tell us that investors do not expect much from the meeting.

In fact with the recent recovery nearly eliminated by today’s slide, EUR/USD short positions should still be at record levels. Skepticism about the EU Summit is well justified and it would be a mistake for anyone to expect otherwise.

First and foremost, tomorrow’s meeting is an informal dinner called by European Council President Van Rompuy. In his open letter to Heads of State and Governments, he said point blank, that this is not the stage “to draw conclusions or take decisions but to prepare politically for decisions at the June meeting in the best possible manner.”

In other words, he is telling us not to expect any policy decisions. Instead it is supposed to be an “open and informal exchange of views on how we can boost growth and jobs across the EU.” Undoubtedly, French President Hollande will use this as an opportunity to pressure German Chancellor Merkel to consider a real fix for Europe in the form of eurobonds, deposit insurance and increasing the effectiveness of the EIB.

Unfortunately these deeply unpopular policies will require German taxpayers to assume greater risk for distressed nations, something they vehemently oppose. The possibility of more head butting between Merkel and Hollande has driven investors to sell euros ahead of the EU Summit. Even though we don’t expect much, the world will be listening closely for any hint of cooperation.

If Merkel shows any willingness to compromise with Hollande’s demands, EUR/USD will rally but if she refuses to budge even an inch on Eurobonds, the EUR/USD could come under further selling pressure. We don't expect Germany to cave and for any decisions to be made before the formal EU Summit which will be held after the Greek elections in late June.

With this in mind however, it is important to have stops in place because the market is EXTREMELY short euros and it so won’t take much to trigger a massive short squeeze.

RBS, on the other hand, reported (for 22 May 2012 trading):

Risk oriented currencies fell steadily vs. the USD during the US session and continued to decline as US equities turned negative into the close.

Supporting the USD appeared to be safe haven flows after former Greek PM Papademos said Greek exit scenarios were under consideration and that Greek exit risk was real. Also supporting the USD were US interest rates, which rose across the maturity spectrum, albeit modestly, despite a late-day decline in global risk assets.

An outlier in the risk-averse move was USD/JPY, which rose steadily throughout the day and traded briefly above 80. This may be a result of the upcoming BoJ meeting and market participants may be expecting further policy action by the BoJ. However, we do not expect additional action to be taken at the May meeting, which may lead to near-term JPY strength.

Indeed, our measure of short-term fair value for USD/JPY is currently slightly below spot at 79.22. As a result, we would be reluctant to buy USD/JPY at current levels.