Euro volatility triggers caution

Activity is almost back to normal in Asia, with key markets returning to trade after New Year’s breaks throughout most of last week.

Source: Bloomberg

This has resulted in some disjointed moves across the board as different markets were shut on different days. As a result, while some markets are simply reacting to leads from the weekend, some are catching up to moves from last week as well.

Today’s session kicked off with some significant FX moves, primarily in the euro which lost a figure against the greenback. EUR/USD traded to as low as $1.1864 in a move exaggerated by stops in the $1.2000 region.

This was essentially the pair’s lowest trading level since February 2006 as it traded through June 2010 lows. The drop in the euro against the USD saw the greenback extend gains against other currencies as it resulted in a flash of risk aversion.

AUD/USD, for example, traded to as low as $0.8053, its lowest since July 2009, before managing a recovery.  The euro has since recovered from the drop but there remains plenty of uncertainty around the single currency and how the next few weeks will play out.

Tough call for the ECB

Greece could spoil the party in coming weeks as talk of a ‘Greek exit’ resurfaces. The past year has been hard enough for the European Central Bank (ECB) as the region fought severe economic challenges and attempted to resuscitate growth.

Just as it seems as though progress is finally being made with the ECB looking at a range of asset purchases to expand its balance sheet, Greece has thrown a spanner in the works. It is now clearly a headline-risk-driven market, with Greek political instability being at the forefront of it all.

Investors will be monitoring polls very closely heading into the elections. Opposition party Syriza has already started being vocal, talking about a Greek debt haircut and cancelling the austerity measures and bailout package.

Needless to say, should Syriza take power, any negotiations with the government will be extremely tense and difficult to get a positive outcome from. This will see market concerns revert to contagion risks and also put any ECB action in doubt. While Mario Draghi continues to talk up expanding the asset purchase program, there will be some doubt this can go ahead – particularly if sovereign bond purchases are implemented without fiscal responsibility and reforms being reinforced. In that case, Greece could see this all put on hold.

Having said that, I suspect we’ll see caution weigh on the euro and equities in coming weeks. On the calendar today we have German preliminary CPI, Spanish unemployment and UK construction PMI to look out for.

Choppy trade for the ASX 200

The ASX 200 attempted to push higher earlier in the session but the gains did not last as caution prevailed. After having enjoyed some solid gains since the Christmas holidays, some traders will be taking profits off the table upon returning to work today.

The materials space was holding up well earlier in the session but it seems iron ore futures are not doing too well, putting pressure on the pure plays. A pullback for the banks has also pressured the local market and seen the early gains erased.

Apart from this reversal lower in the materials and banking space, there hasn’t been a lot going on today, with limited company news.

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