FX: Deep Seated Risk Aversion Worsened by Home Sales

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Anti-risk sentiment continues to drive movements in the currency and equity markets with the U.S. dollar and Japanese Yen trading higher against all major currencies. Between the protests in Spain, strikes in Greece, the looming Spanish budget and S&P’s downgrade of South Australia, there’s plenty for investors to be worried about. If the new reform packages and the 2013 Budget contain some overly painful cutbacks, we could see more social unrest in Spain. Ten year Spanish bond yields rose above 6% temporarily in a sign of the market’s concern that Prime Minister Rajoy’s continued refusal to ask for a bailout will lead to a downgrade by Moody’s, creating a slippery slope for the euro.

So far, the unprecedented measures taken by the Federal Reserve, European Central Bank and the Bank of Japan have failed to generate momentum for risk assets. Having shown all their cards there’s not much more these central banks can do without resorting to firefighting. At this point, it is clear that a formal bailout request by Spain will be positive for the euro and it doesn’t look like the market will take anything less. In the meantime more pain for Spain means for pain for the euro. While 1.2850 is a significant support level, the EUR/USD is currently holding above 1.2825, which is where the 20-day and 200-day SMA converge. A break below this level would be needed to drive a fresh move lower in the EUR/USD.

The U.S. released more housing market data this morning and according to the report, new home sales fell 0.3% in the month of August. While we continue to see signs of a gradual recovery in housing, there have also been pockets of weakness that tell us low interest rates is not enough. There can’t be a sustained recovery in housing until there is a broader economic recovery. The new home sales report only adds pressure on a market that is already heavily burdened by the deep seated risk aversion caused by Europe’s troubles.

Kathy Lien
Managing Director

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