The commodity currencies weakened substantially overnight - even against the Euro and the Pound. There was significant weakness in EUR/USD overnight and this morning; but the pair pulled back on news that Greece would receive another bailout. This fixes nothing in the medium term; but it removes the risk of an immediate exit. Ultimately, we believe it's just a matter of time until Greece leaves the Eurozone. However, the big take-away from today that has had a big impact on market sentiment is the support that Germany has shown to Greece. This sentiment may not last longer than a couple days, or even past today. But while it lasts the Euro and Pound should continue to consolidate against safe haven currencies.
When the U.S. stock market opened this morning, risk was immediately bid up. The S&P futures were floating around -10.50 before the open, and as of right now, the S&P 500 has been bid up +7.80. The Aussie and Kiwi were the primary beneficiaries of the move up, as they are the currencies most sensitive to risk trends. The Canadian dollar remains weak due to worries over the U.S. fiscal cliff. We favor playing any positive developments in fiscal cliff negotiations by buying Canadian dollars and playing negative developments by selling the C$.
If we get to the point where the U.S. equity markets begin selling off quickly, we believe the best way to play that is by trading the Aussie & Kiwi to the downside. We've heard market talk that hedge funds have been chasing yield in Australian dollar denominated equities & bonds and we believe that a sustained move of risk aversion could cause a wave of short covering.
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