What a week. Finally risk seems to be breaking to the downside after trading in a very long summer range. I have to say I thought things would remain range-bound until the next Fed meeting later this month, but it appears the markets weren't willing to bet on a Fed liquidity injection to solve the world's financial problems.
Depending on where you are reading this it is either late Saturday night or sometime on Sunday, which is a little early but that is because I am currently in the middle of my vacation and I am writing this from Camp Curry in Yosemite. So I get to watch the market madness from afar this time round. Thankfully the dollar chose to turn after I had changed my pounds so I am not suffering too much from the break below 1.6000 in GBPUSD.
Without my Bloomberg terminal I am catching snippets of what is going on in the FX world and then having to fill in the gaps. Stepping back for a couple of weeks is actually a good exercise in getting perspective. The speed with which EURUSD tumbled on Friday was quite amusing when I read that it was attributed to the retirement (resignation) of ECB chief economist Stark. Apparently he disagreed with the bond-buying programme so decided to hot foot it out of there. Is this really surprising from a German official? Perhaps he's been poached to work as the economist for a new Northern European bloc of fiscal conservatives...
But when headlines like this cause 100 pip moves then the market may have got a little ahead of itself. So here is my view of things from the sublime surroundings in Yosemite. The undisputable fact is that the Eurozone is on its knees, no one knows what would happen if Greece leaves. Would it default? Most certainly. Would it cause a banking meltdown? Who knows, with Greece out of the way then investors may think the Eurozone stands a better chance of survival, which could boost banks' holdings of other countries' debts, thus negating the Greece effect.
However, the US has its problems too and they are severe. Two things seem to be worrying people over here: firstly, Armageddon in the Eurozone and secondly, a lack of trust and faith in politicians from both side of Washington's aisle.
Confidence has been rattled so much that people are expecting a much worse outcome from the Eurozone debt crisis than they were during the 2008 financial crisis. Combined with that, Obama's job creation plan went down like a lead balloon. Although it is an enormous programme no one really believes it will end up seeing the light of day since there is no way a programme of this scale can be fiscally neutral, which massively reduces its chance of passage through Congress.
However, from my position as a visitor, the US economy looks as healthy as ever. The shops were packed in San Francisco and the streets and museums were crammed full of tourists. The boat going to Alcatraz was creaking with 300 or so eager visitors and the trails in Yosemite are getting some heavy footfall. However, when you have sites like these, no wonder people continue to flock in their droves even if the global economy is on the brink of a double-dip recession.
I digress, but essentially I have two points. Firstly, the stock market hasn't yet worked our all of its issues and there could be more selling until the Fed comes up with the right salvo in the form of QE2 later this month or some solid economic figures helps re-build consumer confidence. Until then I can't see many drivers to fuel a pullback.
My second point is that I am a little worried about getting too bearish EURUSD. This cross is likely to be a vicious see-saw in the next few months, with investors swinging between dollar negative sentiment - especially if there is QE3, and Eurozone fears. Last week's euro sell-off was driven by Trichet's extremely dovish tone at his press conference fuelling speculation of potential rate cuts later this year. But Trichet is only around for another 6-weeks or so before Italian Mario Draghi takes over. If people are worried about the ECB being run by profligate doves from Southern Europe, the hawkish Draghi may come as something of a surprise. Although I don't feel confident to go against the sell euro trend right now, pricing in rate cuts for the Eurozone may be a tad premature....
When I get back I will be following the SNB closely and their euro diversification programme. The SNB is serious about wanting a weak franc, but the other safe haven alternatives in the FX world seem like weak second bests to me. So there will no doubt be people who are willing to accept negative interest rates to own francs just in case the worst scenario becomes reality. Thus the SNB will need to do some serious euro purchases to keep the Swissie's strength at bay. This will require diversification (who wants to hold billions of euro right now??) and that could be one of the trends for the rest of the year.
My next post will be from LA, as long as our hikes to Glacier Point and Half Dome go well in the next couple of days. Good luck trading in these historic times.
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