Currency Briefing - what you need to know for Wed March 7, 2012

The Singapore dollar was hit by investors unwinding carry trades funded by the euro.

IG Markets Singapore said:

The Singapore dollar has suffered in the flight to safety among global investors with the US dollar rising above the $1.26 level.

Traders are showing concerns that the global economic recovery may not be as certain as once thought with a worsening outlook for Europe and China. This has led to many profit-taking and reducing their exposure to riskier assets such as emerging Asian currencies.

The Singapore dollar has also been hit by investors unwinding carry trades funded by the euro.
It has been 24 hours of carnage among stock markets with heavy falls prompted by a harder-than-expected slowdown in China and the eurozone slipping closer towards an inevitable recession.

During this increased uncertainty, traders prefer the safe currencies such as the Yen and greenback.
Greece is continuing to spook the markets and there are rumours it may not meet Thursday’s deadline for getting private bondholders on board for its second bailout fund. Risk sentiment has definitely taken a battering this week.

While this uncertainty remains, many feel the US dollar has the potential to rise as high as $1.27. Any fall back below the $1.25 could see more buying opportunity.

GFT, on the other hand, noted (for 6 March 2012 trading):

Concerns about Greece and the outcome of this week’s bond swap offer have wrecked havoc on the financial markets. The euro weakened against the U.S. dollar for second day in a row as investors offload their longs and add to their short positions.

Based upon the conflicting headlines and rumors circling around the Greek bond swap, it is clear that no one has a good idea about how good or bad the swap results will be. It will come down to the wire for Greece and the price action of the EUR/USD over the past 5 trading days indicate that investors do not want to jump in front of a moving train.

According to Dow Jones, Greece expects as much as 75 to 80 percent participation but there have also been rumors that a number of pension funds refuse to go ahead with the PSI. From a trader’s perspective, if Greece manages to attract more than two thirds participation, there will be opportunities to join the rally.

If the bond swap fails however, the sell-off in the EUR/USD and equities will be strong and violent. It will leave more questions unanswered and as a result, trading will become choppier as Europe goes on damage control.

We believe that a default and activation of the collective action clauses will be unavoidable and this leaves the question of whether credit default swap payments will be made. If ISDA decides that a credit event has been triggered, then our focus will be on the yield spreads of other nations because they will tell us whether there has been contagion.

RBS meanwhile reported (for 6 March 2012 trading):

The USD benefited from the risk-off tone across asset markets. With equities closing the US session over 1.5% lower, the USD strengthened versus all the other G10 currencies, with the exception of USD/JPY, which was largely unchanged at the end of the session.

However, improving US data (and stronger risk sentiment as a result) may begin to benefit the USD, particularly vs. the low yielding GBP, EUR, and JPY whose central banks are expanding monetary easing, as expectations for further QE are reduced.

Another strong Ivey PMI print in Canada was not enough to keep USD/CAD from moving back above 1.00. That said, we did establish a short NOK/JPY trade recommendation ahead of the broader risk sell-off at 14.463, targeting a move to 13.850, with a stop on a two-day close above 14.800. NOK gains look increasingly stretched and recent JPY weakness looks overdone.