Currencies27 June 2011
Robert Lynch | +12125253159 | ROBERT.LYNCH@US.HSBC.COMView HSBC Global Research at:http://www.research.hsbc.comIssuer of report: HSBC Securities (USA) Inc.
EUR/USD in the bigger picture
For all of the consternation over Greece and the intense market focus over each step in the process of acquiring thenext tranche of financial aid, the reality is that EUR/USD continues to hold above the 1.4000 threshold, and at currentlevels (1.4215) it remains higher than both its recent average (1.4040 in the year-to-date) as well as longer term averages(1.3622 in the past year, and 1.3814 in the past five years). We highlight that in an attempt to provide some perspectiveon the impact--or by these measures the lack of impact--that the Greek saga is having on the EUR, at least in theselonger term time horizons.
That is not to overlook the more dramatic effects these developments are having on shorter term movements and indeed, risk managers with short term horizons will understandably have a much different perspective on the matter. And it is also not tosay that conditions could not deteriorate and impose more sizeable losses on the EUR. But at 1.4000, the sovereign debt crisisin Europe is not yet generating a "crisis" for the EUR.Greece parliamentary schedule this week All that said, there is no getting around the focus that will remain very much on the minute-by-minute developments inGreece. In that regard, it is important to recognize the steps in the Greece parliamentary process this week in regards to theausterity and privatization program. Parliamentary debate on the program begins today and a full vote is scheduled for June 29.Assuming it passes that vote (and it is expected to do so), Parliament then immediately begins debate on the implementationlaw spelling out the measures in more detail. This is the more critical and potentially more difficult parliamentary hurdle tocross this week and the vote on these measures, currently scheduled for June 30, is a key market event for the week.China still likes the EURChinese Premier Wen Jiabao continues his trip through Europe and made headlines this weekend saying that "China has beena heavy investor in the euro sovereign-debt market," and that "We have bought a lot of euro bonds over the past years and wewill continue to support Europe and the euro," according to the Wall Street Journal. We have continued to highlight the impactthat reserve managers play in providing good demand for the EUR and many other non-USD developed-economy currencies,primarily as a result of their ongoing need to recycle the USD they accumulate through FX intervention. When consideringEUR/USD's ability to hold above the 1.4000 threshold, as we highlighted above, reserve manager demand must be consideredin the equation. And comments like those over the weekend from Premier Wen will only enhance the market's perception thatChina and other large reserve managers will continue to have EUR buying interest, particularly at lower levels.EUR/USD volatility and risk reversals remain near recent extremesIn that regard, we noted last week that the mid-June spike in EUR/USD implied volatility and enhanced premium for EURputs in the risk reversals should both reverse somewhat, assuming we were correct in our assessment that the spot rate wouldnot endure more sizeable losses. Thus far, the spot EUR/USD has indeed held up, but volatility slipped only temporarily earlylast week and has since moved back up towards its recent highs, with 3-month implied vol trading near 13.5% this morning,up from last week's low near 12.7%. In addition, the 3-month EUR/USD risk reversal has extended its recent decline and is