Forex markets:This year the month of August spared the markets unpleasant surprises

Set 3, 2012

Minute Read

This year the month of August spared the currency markets unpleasant surprises, but crunch time will come in September……

For professional investors and advisers only

If next week the ECB disappoints the expectations which in August allowed the euro to recover the losses incurred in July, the exchange rate will risk backtracking towards EUR/USD 1.20. Developments in the euro area may also significantly impact sterling and the yen.

This year the month of August spared the markets unpleasant surprises, and the situation actually quietened down somewhat on the forex markets in particular. However, August movements should not be considered as indicative, as the market is in any case thin and caution in reading developments is therefore a must. September, on the other hand, will be the month of truth. Next week the euro area crisis will be in the limelight: the main event will be the ECB meeting on Thursday 6 September, but any day will be good to provide input – via statements or rumours – on the progress being made in terms of the anti-crisis measures/plans in Greece, Spain, and at the supranational level.

EUR – In August the euro recovered the serious losses incurred in July, when the exchange rate plunged from EUR/USD 1.26 to 1.20 – a low abandoned two years ago (in June 2010, during the first Greek crisis). The euro gradually rose back in August to 1.26. Rather than by positive developments, the recovery was fuelled by statements made by the ECB and/or national governments, which let on that the authorities were working non-stop to (1) prepare effective anti-crisis initiatives to be launched in September, while (2) resisting the lurking temptation to allow the dissolution of the euro area. This led to expectations for the September agenda which helped maintain a moderately optimistic sentiment in a short-euro market, allowing the single currency to rise back. However, it should again be stressed that the recovery moved from lows abandoned two years ago, i.e. from 1.20: therefore, the movement cannot be described as a rally. Also, expectations emerged as being the main driver, which means that the exchange rate would be exposed to a swift correction (at least towards 1.20-1.18) should they be disappointed. On the other hand, if tangible anti-crisis actions crisis do start to come through, possibly already as of next week, the euro should be able to consolidate its August recovery. From a technical standpoint, the upside front will only open once the 1.2531-1.2564 corridor is fully broken through.

GBP – Sterling also strengthened against the dollar (from GBP/USD 1.55 to 1.59), but less so than the euro, against which it backtracked slightly as a result (from EUR/GBP 0.78 to 0.79).
While contained, sterling’s movement is less “genuine” than the euros, as the fundamental picture of the UK economy has not improved in August. Therefore – next week and/or in the following weeks – the pound will be exposed to a higher risk of correcting. As regards next week, we do not expect changes to be announced on occasion of the Bank of England meeting (Thursday), neither on rates nor on the APF, which, however, could be reviewed in October or November. Therefore, sterling should be conditioned both by the euro’s movements and by domestic economic data (August PMIs due out on Monday and Wednesday, July output on Friday). Consensus expectations point to generally improving data. However, any disappointment would result in the pound easing back both against the dollar and the euro.

JPY – Nothing much changed for the yen in August: against the dollar it stayed within the same range as in July, between 78 and 80 USD/JPY. Moderately positive market sentiment on the euro area was not enough to shake the Japanese currency out of its lethargy, as it was more than balanced by uncertainties/concerns tied to the downside risks weighing on the global economy.
Any positive developments on the front of the European debt crisis could be enough, alone, to at least trigger a weakening of the yen.

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