European equities are up, Spanish bond yields are down and yet the euro is weaker against the U.S. dollar. This counterintuitive price action shows that the EUR/USD and other currencies are struggling for direction. The news that Eurozone Finance Ministers have agreed to offer Spain EUR30 billion by the end of July should have rallied the EUR but the currency continues to tick lower. While the emergency loan for Spain is good news, EU Finance Ministers failed to provide enough details on decisions made at the EU Summit to satisfy investors. We are also still waiting for the German Constitutional Court to give its stamp of approval on the ESM, Europe’s new bailout fund. In terms of Spain, the mechanics behind bank recapitalization still needs to be worked out and it seems that the discussions won’t take place until September because a single banking supervisor needs established and a proposal isn’t expected until that time. The lack of details this week clearly reflects the lack of agreement. Hopefully the details on Spain’s bank bailout will be provided on July 20th, when Finance Ministers reconvene in Brussels to finalize their agreement because other wise, the EUR/USD is in big trouble.

The euro is not the only currency struggling for direction. The AUD, NZD and CAD have performed well this morning despite mixed Chinese data. China’s trade surplus jumped from $18.7 to $31.73 billion in the month of June. At first glance, this looks like a major improvement for the Chinese economy but with import growth slowing to 6.3% and exports growing a mere 11.3%, the data confirms that domestic and external demand has weakened significant. Some local economists estimate that export growth could shave as much as 1.5% from Chinese GDP which would most certainly necessitate further easing from the PBoC. China’s second quarter GDP report is one of the most important event risk this week.

With economic data showing clear signs slower growth in the U.S, Eurozone and China, it is no surprise that investors are cautious. Although many central banks eased monetary policy last week, the fear that the second half of the year will be weaker than the first has prevented currencies and equities from recovering. We expect the EUR/USD to remain under pressure until there is some unambiguously positive data for the U.S. or Europe and unfortunately this is a light week for economic data, which means that the only potential catalyst for a turnaround in the euro will be tomorrow’s FOMC minutes. If the Fed is extremely dovish leading investors to believe that QE3 is back in play, the EUR/USD could finally find some support.

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