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FX: Safe Haven Currencies Soar, Eyeing 1.35 in EUR

Last updated 11/9/2011 9:29 AM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

Financial markets are a mess this morning with currencies and equities trading sharply lower. The FTSE and DAX are down more than 2 percent and this could be one of those days where the Dow also falls 300 points, driving investors back into the arms of the U.S. dollar. Safe haven currencies are performing extremely well this morning at the expense of the EUR, AUD and NZD. Safety is everyone's number one priority and the U.S. dollar and Japanese Yen are the most attractive plays.

Since the start of the European trading session, the EUR/USD has already fallen 1.50 percent and unless European policymakers sweep in like a white knight (which is highly unlikely) over the next 12 hours, the EUR/USD could poised for further losses. The volatility in the market has sparked rumors that the ECB will be holding an emergency meeting - although this hasn't been confirmed, European officials wouldn't be doing their jobs if they weren't at least calling each other frantically. As the third largest country in the Eurozone, it will be 10 times more difficult for Europe to bail out Italy than Greece and at its current size, the EFSF does not have the capacity to support the Italian debt market. For this reason, if Italy is forced to default on its loans, the impact on the euro would be a far more significant impact than the carnage created by Greece. 

By now, everyone knows that Italian bond yields have moved into uncharted territory since the introduction of the euro with 10 year yields rising more than 50bp to 7.25 percent. Reality is setting in with investors realizing that it won't be long before Italy is forced to extend its hand out for financial support. The latest tensions in the market was sparked by European Clearing House LCH's decision to raise its margin requirements on BTPs, causing investors to dump Italian bonds left and right. Expect European officials to scramble to look for ways to stabilize the markets. It may be too late for Italy to restore confidence but if European policymakers do not step in with some type of response, we could be looking at months of less credit, balance sheet deleveraging and uncertainty which would not bode well for currencies. With no major U.S. economic reports on the calendar today, keep an eye on the headlines and on the 1.35 level in the EUR/USD.  

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Comments (3)

mbrad77

November 09, 2011 at 10:35 AM ET

I read somewhere , that Italy's 10 year yield reached a high of 13.75% in 1995. You said here that it just reached uncharted territory at 7.25%. Could you please verify which information is true?

klien

November 09, 2011 at 11:12 AM ET

should read since intro of euro

mbrad77

November 09, 2011 at 11:14 AM ET

ok.. thanks for the quick response

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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.