Forex News and Events
The EUR-complex finally takes a breather after 5-figure dive last week on massive ECB stimulus package and Greek elections. The Greek bonds rallied, the sovereign curve steepened in the short end, shifted higher on the back-end after the anti-austerity Syriza’s historical victory on Sunday elections. Syriza reached 149 seats over 300, just short of the absolute majority, Samara’s New Democracy gained 76 seats, and while Golden Dawn placed third confirming Greeks’ crave for change. Nevertheless, we see little chance for a Grexit. Tsipras will certainly renegotiate the Greek debt and the austerity measures before agreeing on the next aid package (deadline on Feb 28th), while keeping Greece in the Euro-zone. The political pressures should keep the Greek bonds tense over next weeks, while the Greek debt should become eligible for the ECB QE by July 2015. After hitting the fresh low of 1.1098, EUR/USD bounced back at Europe open signaling that the pair is finally ready for short-term bullish correction.
Tensions on EUR/DKK ease. For how long?
EUR/DKK 25-delta 1-month risk reversals started the week slightly higher as EUR-complex stands ready for correction amid last week’s five figure dive. Yet the tensions on EUR/DKK persist as the market did not fully buy the DNB’s two straight rate cuts past week. At least on the derivatives market. By these policy actions, the DNB only pulled the attention on the EUR/DKK peg, while silent FX interventions would have avoided the speculative rush into short EUR/DKK positions. On a side note, we remind that the market for EUR/DKK derivatives is very tight, with very little volume as the EUR/DKK peg is in place for quite a longtime. This means that the sharp moves can simply come from the illiquidity of the market and not because of massive change in positioning. Yet from what we see, the market went aggressive from net EUR/DKK calls to net puts and stays significantly negative.
The low liquidity on the RRs bring us to examine in detail the situation on the futures market. The EUR/DKK 3-month cross currency basis sharply reversed confirming preference for lower EUR/DKK in the futures market. This means that the stress in the markets is now being priced in on the futures curve, extending the issue to months ahead.
The situation today is not alarming per se (given that the preference is not out of historical range), yet further stress is certainly underway for the EUR/DKK peg. While DNB still has room to defend the peg, we believe that two interventions in a week has just attracted speculators’ attention, and might push the bank toward more aggressively defensive strategies in the coming weeks, months. With the massive ECB stimulus and uncertainties on Greek political situation, there is little chance that in the short-run real money names return to EUR. The DNB will possibly proceed with further surprise cuts, and complement its defensive strategy with increasing FX interventions, should the EUR/USD extends weakness to parity! The issue may easily get quite complex as the operation may, as in Swiss situation, get too costly and involve politics in the picture. The EUR/DKK peg came at risk from the moment it has been placed under the spotlight and attracted the market attention - to the extent to trigger an official reaction. The removal of EUR/CHF floor on January 15th showed the speculative forces may get strong enough to abolish official rules. And this is where the speculative volumes may challenge the EUR/DKK peg. For aggressive speculative names, funds, hedge funds, there is clearly money to make in such events. While the timing of such tail event is almost impossible to foresee, in the case of the EUR/DKK peg in place for such a long-time, the major risk is seen on the speculative component of the FX trading.
Sharp reversal in preference for DKK vs. EUR
This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.
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