EUR makes a statement to close the week

FX Closing Note: EUR makes a statement to close the week

Today's market made an interesting statement about the state of affairs in FX. While the EuroZone situation has been considered by many as an important factor contributing to the last couple of days of nervousness in risk appetite globally, the evidence doesn't really bear this out. As we mentioned in this morning's update, the market's apparent assessment of the real EuroZone risks as measured by the usual spreads and other indicators has actually improved slightly over the last couple of days with the Greece/IMF/EU summit framework announcements.

Meanwhile, the usual suspects one would expect to go weak in the knees - EM currencies, the Aussie and the Loonie. The furious JPY rally this week took a breather today on the US bond market finding solid support in today's action.

Looking ahead
Next week is very interesting from a couple of perspectives. We look at the week ahead by looking at the questions next week might be expected to answer and where there may be the most volatility, i.e., opportunity for the FX trader:

1) JPY and Bond yields: How does JPY deal with pivot to a new Japanese financial year?
We've seen quite a move in interest rates (the most important market by far for the JPY outlook) this week - a temporary scare of some sort or signs of further rises in yield ahead? The new Japanese financial year starts on Thursday. JPY crosses will bear close scrutiny next week. The action before and after the New Year has been very volatile over the last two years and this tradition could continue this weeks considering the fireworks we've seen already.

2) Massive squeeze on short Euro positions ahead?
It's hard to escape the bearish Euro headlines of late and the market has been attributing too much of the current situation to negative headlines on the Euro when Greek debt spreads and other indicators have been relatively stable of the last couple of days. Could this EU Summit represent a temporary climax in the bearish Euro action if everyone who wants to short Euro is already short up to their necks? Also, what's the best pair to trade if we see a squeeze? Our guess is that the likes of EURAUD, EURCAD and perhaps EUR/CEE have the most volatility potential, especially if the answer to our Question 3 below is Yes.

Chart: Euro vs. rest of G-10
The Euro has sold off massively vs. the rest of the G-10 currencies, to the tune of 7% or more on average since late last year in a sharp and sustained fashion. Today saw the market taking back some of the heavy speculative Euro shorts in the market. We're no fans of trying to catch falling knives, but wouldn't be surprised if better levels to short the single currency can be found in the week or two ahead as long as the news flow around the EuroZone remains relatively benign, and especially if risk aversion reigns.

3)Will risk aversion reign in the short term? And which of the G-10 currencies will be punished the worst if so?
We've seen quite a squeeze on long Aussie and Loonie positions over the last few days vs. the greenback, and a general squeeze on EM longs as well. We have also recently commented on the Aussie's lack of response to the final runup in risk ahead of the last two days of weak knees from the bulls. Today, the Aussie was absolutely creamed across the board (have a look at the climactic AUDNOK reversal, for example), which leads us to suspect that it is likely to remain the weakest of the G-10 currencies next week if a fresh wave of risk selling sweeps through markets.

4)Will US Employment report (Change in nonfarm payrolls and unemployment rate) to be released Friday April 2?
We already know the answer to this one: YES. The BLS and the major news services still have it on their calendars that the US employment report is schedule to be released on next Friday. We thought that this was a bit strange this morning when we noticed this, as the US stock exchanges are closed for Good Friday next week, which they are every year. It is unusual to have a market holiday on a day that is not a banking holiday, but rules were meant to be broken - and our memory must be failing us, because this very same situation took shape in 2007, when bond markets had  rip-roaring sell-of while equity traders had to sit on their hands.

5) Healthcare an issue for risk?
One interesting headline that is worth a think as we head into next week: ATT is announcing a $1 billion writedown due to the new health care legislation that has finally made it through both houses of Congress. (A Bloomberg article estimates a possible cost to corporations of $14 billion stemming from this new bill). One would think that market observers would have already priced anticipated cost increases for companies into anticipated earnings, but it is a factor worth consideration.