Currencies risk on only temporary

Risk on in equity markets has spilled over to FX, but this should be seen as a short covering phase and the trend remains risk off into next week.
Profit taking on short positions in riskier assets has been driven by the hope of a Eurozone coordinated bailout of banks (FT) and Bernanke leaving the door open to further QE. EURUSD also managed to bounce off a key Fib retracement level and a phase of EUR correction appears to be underway, especially with the approach of the ECB meeting. Hopes are fading that the ECB will cut interest rates, though this is not seen as a major swing factor as the market expects a rate cut to arrive by Jan 2012. What will be more important is the ECB liquidity measures and how aggressive they are. The bias is for aggression re extra 6mth month market operations and 12mth LTRO and this could extend the EUR bounce to 1.3410. Even so, this should be seen as a corrective bounce, as the trend remains towards a test of 1.3000. Though Moody’s 3 notch downgrade of Italy brings it into line with S&P, the outlook is still negative. More importantly, Moody’s warn that if Italy’s access to public debt markets become more difficult that the country’s rating could transition to ‘substantially lower rating levels’. Greece, Ireland and Portugal have all been through this rating death spiral. Finally, Moody’s analysis suggests that Belgium should be downgraded soon, even without the Dexia debacle. Risk off can easily return into the early part of next week. Elsewhere, EURGBP ran into strong selling interest from a clearer yesterday and stopped a test of 0.8510. Though EURGBP is now mid range, the sentiment has turned short term and could leave GBP liable to reacting negatively to a QE2 announcement tomorrow – IDEAglobal call is that this will occur and EURGBP could head for 0.8715. Elsewhere, the commodity currencies bounce has been less impressive than the EUR’s as long liquidation continues to overhang the market, as worries grow on the global economy and Europe. For the AUD the upside should be capped around 0.9625 and look for a move down to 0.9400. Meanwhile, though the NZD has held a bit better in the very short term, once 0.7600 goes then the downside should open up more quickly to 0.7400. 0.7700 should cap the upside

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Great market comment, thank you