Remarks from Dutch finance minister saying bond holders of Irish banks "will have to bleed" in consolidation raises speculation of investors having to take haircuts for sovereign bonds, which is always a negative for the euro

Aside from Korea skirmiches and the FBI raids of several US hedge funds, rising Eurozone credit spreads extend beyond Ireland as Portuguese, Spanish, Greek and Italian 10- year spreads relative to Germany hit their highest sinc Nov 11-12). Good US data (US Q3 GDP revision to 2.5% from 2.0%) is good for the US dollar as was proven after last week's Philly Fed survey, as data weakens the case for buying the entire $600 bln in QE2. Korean border fire, FBI raids of US hedge funds & prolonged Irish uncertainty are all ideal catalysts for renewed risk-aversion. Despite the late session rebound in US Monday session, markets are back in sell mode. USD & CHF regain the bulk of risk appetite, with the YEN catching up after having been hit by the exchange of fire across the Korean border, resulting into 4 casualties. YEN has always sold off during Korean tensions, but the broadening market selloff is now lending it support.

Importance of EURUSD 55-week MA
The importance of the 55-week MA in EURUSD is illustrated in the chart below. The last 2 occasions EURUSD fell below this key measure of medium-term trend was in January 2010 (during Greece sovereign crisis) and August 2008 (market deleveraging). The 55-week MA is currently at $1.3480. Although the market did touch well below $1.3480s, it did NOT close below it. With 3 days left into the week and the rise in the Eurozone credit spreads extending beyond Ireland (Portugal, Spain and Greece), the case against EUR continues to deepen (accelerate) and broaden (extend onto other currencies). EURUSD now likely to call up $1.3320, followed by $1.3250. EURCHF eyes the key support of 1.3280 (double bottom), break of which risks extending losses towards 1.31.

Look at this S&P500 Weekly chart showing the market topped out this month exactly at the same level of mid April 2010 --when US Govt announced Goldman Sachs Investigation. The fact that this level 1127 coincides with the 61.8% retracement of the decline from the all time high (Oct 2007) to the 12-year low (March 2009)

Ashraf Laidi
Chief Market Strategist
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CMC Markets
133 Houndsditch
London EC3A 7BX
Direct +44 02 030 038 674
Mobile +44 07 917 208 527
Email: a.laidi@cmcmarkets.com

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