Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 28 January 2010 at 21:12 GMT

GBP goes belly-up on S&P comments

Head of FX Strategy / Saxo Bank

FX Closing Note: GBP goes belly-up on S&P comments

The pound suffered a heavy beating today as the S&P came out with rather harsh words about the UK and its banking system. The ratings agency stated that the UK is no longer among the most low risk banking systems, that the weak UK economy continues to hurt UK banking credit and that the UK bank industry profile will only improve with the economy. As these pronouncements crossed the wires, GBP dumped sharply across the board. GBPJPY lost over 200 pips on its highs of the day, and GBPUSD - after having changed directions for the fourth time in four days, changed direction yet again mid-day and headed south. It was rather difficult to draw a bead on why the GBP was strengthening previously, save perhaps for continued GBP accumulation on the Cadbury deal or as a "well at least it's not the Euro" trade. And a weakening move in the relatively poor environment for risk makes a bit more sense here.

The Euro remains mired below 1.4000 as the Greek debt situation suggest continued lack of trust in that country's credibility and perhaps also the lack of a sign that the EuroZone is pulling together to do something about it.

Chart: P.I.G.S.Spreads
The below chart shows the spread of PIGS 10-year notes to German Bunds. Greek spreads have gone ballistic again - a worrying sign for the Euro and risk sentiment generally.

In other news, risk continues to look shaky, with commodity currencies still very much on the defensive. The noise level on a imminent Chinese revaluation is increasing and the regime's activism on the credit bubble in the Middle Kingdom is seeing drastic measures taken by Chinese banks. It feels like the days of multi-year lows in volatility are firmly in the rear-view mirror.

Technical comments
GBP - looks suddenly weak with bearish GBPCHF candlestick formation, bullish hammer formation in EURGBP and GBPUSD looks more vulnerable yet again, with the 1.6080 area looking like a possible catalyst for a try at the 1.5835 low from December

USD - looking much stronger relative to the beginning of the US session. Would like to see a strong follow through lower in AUDUSD, which could be on the way to test the 200-day moving average if risk aversion keeps up a head of steam here, to see a broader confirmation of USD strength.

It looks like we may be swinging through the big Fibonacci area (0.8960 and a bit lower with recent slippage) we have discussed much of late. If the risk takers out there remain weak in the knees, we could be looking at a test of the 200-day moving average.

Scandies - SEK and NOK tried to pull a reversal to the strong side yesterday and today, but these moves have been rebuffed by shaky risk appetite. USDNOK upside looks interesting

EUR - will remain vulnerable as long as Greek spread continues to spike!

Looking ahead
US and Canadian GDP figures are up tomorrow - is the strong data already priced in? Seem like the market has more on its plate than these figures at the moment, with the situation in the EuroZone and more forward looking and important data up next week. Watch out for potential verbal broadsides from the Bank of Japan overnight after the JPY's recent strength.

Stay careful out there.

25 February
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