Currencies anticipate the joys of today’s Troika meeting – we think there is more to be expected

Review: Good news

  • The only important economic indicator on Friday was the German IFO index. Both the IFO Current Assessment and the IFO Expectations beat consensus estimates and, moreover, they were at higher levels compared to last time.

  • The EU budget talks collapsed on Friday and were postponed until 2013. The collapse did not affect the FX market, but it is a signal of the political challenges facing the EU when 27 countries must reach agreement.

  • The election in Catalonia did not give an absolute majority to the separatists. Hence a referendum on independence has been postponed indefinitely.

  • The market players are optimistic prior to today’s meeting of the Troika (the EU/the IMF/the EC) at 12.30.

EURUSD, EURJPY and EURGBP saw decent increases on Friday (EUR strengthened). This was fuelled by the generally positive sentiment prior to the extraordinary meeting of the euro zone finance ministers.

Market sentiment: Positive sentiment prior to the decision on Monday.

Opening levels were mixed this morning – Japanese and Chinese equities are at about 0% despite positive markets Friday night. Today’s Troika meeting will have a strong importance in the long term.

  • Greece: Will the country be promised more money or is it time for ‘Grexit’? Agreement to pay out the loan tranche will eliminate an important element of market risk and contribute to a generally positive sentiment until the turn of the year. That is what we expect.

Today’s most important events: Troika meeting decisive for the sentiment.

  • Meeting of the Troika (EU/IMF/EC). Today’s meeting of the EU, EC and the IMF may turn out to be a thriller. The meeting begins at 12.30, but no final decision is to be expected until late tonight. We expect that a decision will be reached, but on 3 December, the EU finance ministers meet to discuss whether Cyprus is to be granted a rescue package. Could they postpone a decision until 3 December? Such a development has been seen before.

EURUSD (NEUTRAL): The positive sentiment lasted throughout the day on Friday.
We are still convinced that Greece will be given its loan tranche today and not on 3 December as rumour has it. In support of our view is that the German parliament, which must approve all new obligations, has already planned a ‘ja’ or a ‘nein’ for the end of this week.

We expect that the subsequent reaction will result in relatively strong support for EUR, but of course the development over recent days has to some extent anticipated the joys.

Resistance and support:

  • Downside: A breach below 126.50-127.30 paves the way towards 124.75 and then 120.50.

  • Upside: 130.00-130.25. Then 131.72.

EURGBP (NEUTRAL): Interesting development to be expected – we expect GBP weakening in the three to six-month term. Keep an eye on:

  • Economic indicators: The Olympics gave a temporary boost to the economic indicators – we expect this is over now.

  • Autumn statement: We see an actual risk that on 5 December Prime Minister Cameron will reveal that the state will not be able to meet its target to stabilise the budget in 2015- 2016. Will the AAA rating be in jeopardy?

  • Signals from the Bank of England: The inflation report as well as the minutes from the interest-rate meeting signalled that the Bank of England is ready to introduce further quantitative easing.

  • Appointment of a new central bank governor: The appointment is expected to take place in December, and the new governor will take office in June 2013.

EURGBP
EURGBP

GBPZAR (Investment case): We should like to advocate our investment case in GBPZAR recommending purchase of a 3-month put option, strike equal to the spot price. The price is almost 2%.

We see a great potential but prefer the approach of an option. If things go wrong, they may go really wrong. But when buying an option, you know your maximum loss.

GBPZAR

GBPZAR


Short Term


Chart: EURUSD - positive technical signals

EURUSD