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FX: What we are Watching Today

Last updated 9/23/2011 9:27 AM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

There was a general sense of hopelessness in the financial markets on Thursday as investors around the world threw up their hands in defeat. The mood has improved slightly this morning but overall, there is still feeling of somberness. The euro and sterling rebounded against the U.S. dollar but the New Zealand dollar and the Japanese Yen extended its losses.  Dow futures are also down sharply, pointing to a lower open while gold prices have fallen another 2.5 percent. Until there is a tangible reason for investors to turn optimistic, risk aversion should remain the predominant theme in the financial markets. 

With no U.S. data on the calendar today, Europe's sovereign debt troubles will dominate the headlines. CDS spreads continue to rise but the problem is that CDS spreads on European banks have soared as well which means investors are pricing in larger losses on loans and a greater chance of default. S&P and Moody's have been lowering the credit ratings of European and U.S. banks throughout the week which only added pressure to market sentiment. ECB member Nowotny admitted this morning that banks are having a tough time getting long term financing which could necessitate additional support from the ECB. In fact Europe in general is preparing for a Greek default with central bank officials trying to alleviate market concerns by saying that French banks can handle the default. At this point, the Europeans have two choices - announce a Eurobond or let Greece default. Allowing Greece to default would not be the worst thing in the world. Yes, it would cause significant volatility at the onset but would eliminate one of the biggest uncertainties in the market and which could be positive for the euro in long term.

Meanwhile the G20 communique was released overnight and unfortunately it contained all words and no action. Finance ministers around the world pledged to work together and acknowledge the seriousness of the financial crisis and urgency for solution. Without any tangible results though investors are once again disappointed. A G20 press conference is scheduled for this afternoon followed by a speech by Trichet - we will be watching the headlines closely for any market moving comments. Also keep an eye on USD/JPY which is coming very close to its record low of 75.95.

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Comments (2)

mcrawford30

September 23, 2011 at 11:15 AM ET

Kathy, could you please elaborate on how a Greek default is not "the worst thing in the world"? If a few banks take a haircut on Greek bonds, and the euro tanks for a little while, I follow your logic that it will ultimately be good news for the euro and the market in general.

But would not a Greek default create some balance sheet and/or liquidity issues with banks holding the bad debt, especially if they are from countries already in trouble (like Italy and Portugal)? Is this not the whole issue of contagion and the ripple effect from a sovereign default?

I agree that the world will go on despite Greek default, but are you saying that the event is already priced into the market or are you NOT expecting the contagion effect to pick up steam?

mbrad77

September 23, 2011 at 11:34 AM ET

I'd also watch EUR/JPY, as this pair is also making new all time lows. Another BOJ intervention is imminent.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.