Weekly market summary

The euro has appreciated strongly last week, rising consecutively for the last three days of the week. This rise was accompanied, among others, by a recovery in government securities of European countries found under the microscope. In turn, the risk appetite in the market helped.

Strong recovery in the euro


The euro has appreciated strongly last week, rising consecutively for the last three days of the week. This rise was accompanied, among others, by a recovery in government securities of European countries found under the microscope. In turn, the risk appetite in the market helped.

Most stock indexes in the world have gained ground. The Dow set new highs since August 2008 and extended its climb upward trend for the seventh straight week. The price of commodities also rose with the exception of gold.

One Giant Leap

The cross between the euro and the dollar (EURUSD) jumped from minimum of four months to one month maximum. If a coin under constant pressure and suffering very pessimistic comments, went quickly to the other end.
From the technical point of view the pair could not confirm the break in the important area of 1.3430/50, which we would expect a decline and perhaps some profit taking in the coming days. Climbing and confirm the break of this level, the euro may extend upward against the dollar rally.

The appreciation of the euro and the improvement in the performance of debt securities of certain European countries does not mean that the European crisis has passed. This is something momentary and challenges on the continent remain.

In past week while Portugal and Spain, Greece and Italy were able to place debt with no problems in the markets continue to operate with a higher cost. In turn, the success of even be financed in the market is overshadowed by the great problem which is the high level of indebtedness. There may be a lot of money to lend to these countries, but in the end, it is from these countries that should be generated to repay the borrowed money. The latter depends only on the economic developments. Europe to solve their problems need to grow and grow and to do that. maybe you should evaluate whether certain countries need to restructure its debt.

A restructuring is seen as very frightening, an event that involves accepting irresponsible past and a great ghost. However, if in the past if operated irresponsibly why not accept it and fix the problem? A debt restructuring or default does not mean chaos if done neatly, so it is possible and should not be a frightening scenario. While the beginning may cause tension in financial markets in the long run can be an event that places certain countries in order and with a higher propensity to grow smoothly in the future. Better do it before the restructuring before the market have to do it.

In part, this week’s rise of the euro against other major currencies was the announcement of both Japan and China to buy European debt. This was a positive event, but only a gain of time to act and solve problems.

The debate now revolves around whether or not to extend the European Financial Stability Fund. So if you can bring certainty, avoids discussion of deeper issues and necessary.

Another event, which according to several reports pushed the euro, were Trichet’s words on inflation (which has surpassed for the first time since 2008 the central bank’s target.) The perception of the message was that the European Central Bank could raise rates to combat price rise, if it gathers pace in the future. While this was announced, raises many doubts that will happen. The current price rise is being driven by the increase in the price of energy and nutrients. A rate increase would do little to curb these increases. In addition, although it has been a long time, still remembers when the ECB raised interest rates months before the explosion of the financial crisis. There were times when oil traded above $ 120 a barrel.

The economic data also helped the euro: it was learned that Germany grew in 2010 at the rate highest since the reunification of the country and industrial production rose in December. On the negative side, a new Greece downgrade (below investment grade) go unnoticed by the market, which has already discounted these events.

Conclusion: in a few days, the euro went from being under pressure to rise sharply.Apart from showing the foreign exchange market, you can not talk that the euro is in an upward trend and recovery in the medium term. Not when a week ago, the ECB left the market to buy debt of Portugal to calm tensions, when the Spanish financial system is strongly tied to the financing of the ECB and the situation in Belgium continues to worsen.

The book accompanies the euro

The UK currency accompanied the euro in the rally along the market and followed him to the common currency in the weekly performance podium. Optimism led investors to buy the pound and also to give an endorsement to the title of the English government. Crossing against the dollar (GBPUSD) broke a major downtrend line and pushed himself hard, eliminating the bias was bearish. Remains to be seen whether this week, the pair will climb above 1.60, which is a necessary condition for a continuation of the bullish rally.

On the negative side from the fundamental point of view, the economy of the United Kingdom shares with America a big problem that still shows no signs of recovery: the real estate sector. The numbers are showing that housing prices not only not recovered, but have declined slightly in recent months.

This week we will know too much data from the British economy which can add volatility to the currency crosses. The publications cover employment and inflation data from sales to retailers.

Aussie, under pressure

The worst-performing currency was the Australian dollar, which continues encountered in 2011. The optimism in the markets could not overshadow the floods that the country is suffering, who in turn joined a weak employment report. The fall against the dollar (AUDUSD) product remains moderate loss of strength of the greenback. The crossing between the two currencies has lost a lot of upward force, and while this does not imply that a big drop, you need to go back above parity level and approach to enable highs new highs.

At the other extreme was the kiwi, New Zealand’s currency was the best in the group of those linked to commodities while Canada still remains strong. The crossing of the latter with the dollar (USDCAD) marked minimum in years and only now are doing what the Kiwi and Aussie made months ago.

The Canadian dollar gave back interesting movements as signs of moving on their own and a different tune than the rest of the group. At times was correlated with the evolution of the dollar, if it was up over the market so did the loonie, and so he fell.This is a unique situation that occurred in repeated moments.

Economic data this time did not follow the dollar

The dollar was among the worst performing currencies, gave the proceeds from the first week of 2011 and only rose against the aussie. It is unclear future outlook for the dollar, although it was on the verge of important technical levels in several of its crossings, which continue to fall could enable a further decline in the coming weeks.

This time the economic data did not surprise positively. Retail sales showed a small increase that helped the recent optimism and orders rose grant performance.Consumer confidence showed a surprise decline. Among the positive, noted a reduction in trade deficit and the budget (good fundamentals for the dollar towards the long term) and an increase in industrial production.

Treasuries gained ground in most parts of the curve, which took off when the dollar and the weakness was mainly explaining the dollar against the yen (USDJPY).Purchases by the Federal Reserve seem to be doing their part and that even the risk appetite pushed the junction. The risk appetite based on the spirit found in business and the positive earnings reports from companies last quarter of 2010 that began to appear.

In many sectors of the economy will note a clear optimism for what’s coming in this year. A clear example was the event in Detroit, the car show. The entrepreneurs expressed very optimistic about the future and there was even job recruitment ads.This scenario is vastly different to that experienced two years ago, when in the middle of the exhibition, personal goodbye and major companies are begging the federal government for financial assistance in its struggle for survival.

Another factor that reflects the current market cheerfully VIX is a volatility indicator reached the lowest since 2007 (when the Dow Jones scored highs) days ago. High volatility is often associated with negative events and negative trends market, tools that lower up-market volatility for stocks.

Facundo Molina is founder and director of MolFX - Management, a company fully specialized in Foreign Exchange Markets, with an important client portfolio through Capital Markets Services LLC (CMS). He has a BA Business Management at the Universidad Nacional del Sur (Argentina), where he has a doctorate degree based on the application of Fibonacci theory into financial markets. He also acts as professor of new and experiments traders.