EUR: Short and Long Term Risk for Euro

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Daily FX Market Roundup / Asia Preview 06-18-12

EUR: Short and Long Term Risk for Euro
USD: Holding Strong Ahead of G20 Statement
GBP: Inflation is Important to the Bank of England
AUD: Looking to RBA Minutes for Clues on Central Bank’s Dovishness
CAD: Wholesale Sales on Tap
NZD: Current Account Figures to be Released
JPY: Down Against USD but Little Consistency in Price Action

EUR: Short and Long Term Risk for Euro

The price action of the EUR/USD today tells us that investors are not convinced that the Greek elections eliminated the risk of holding euros. The fear of more trouble for Europe and weakness for the euro is spot on because Greece was never the primary problem. It was worries about contagion and spillover into larger nations such as Spain and Italy that really spooked investors. For this reason it is not hard to understand why investors shrugged off the best case outcome for the Greek elections on a day when Spanish 10 year bond yields topped 7 percent. Spanish yields have officially entered the danger zone – borrowing costs have reached levels that forced Portugal, Ireland and Greece to request for a bailout. With money flooding out of Spain, we are just counting down the days until the country will be forced into full sovereign bailout. The only question then is whether Europe can afford it. If not, a Spain euro exit will become the greatest medium term risk for the euro and the financial markets in general. As the world’s 14th largest economy and Europe’s 4th, a bailout of Spain may be impossible. So far Spain requested for a loan of EUR100 billion to bailout its banks but according to independent rating agency Egan-Jones, they need as much as EUR300 billion. A sovereign bailout would likely cost in excess of half a trillion dollars. Last week, rating agency Moody’s downgraded Spain’s sovereign debt rating to Baa3, one notch above junk. Confidence in the Eurozone is extremely fragile and for this reason, the EUR/USD should remain under pressure. In the coming days, the currency pair will move tick by tick with Spanish bond yields and a large part of that will depend on this week’s Spanish bond auctions. If the auctions still attract sufficient bids, the EUR/USD will hold above 1.24 for the time being but if demand is insufficient, traders will punish the EUR/USD. Here are some important events that pose short term risk for the EUR/USD this week because they measure the impact of 7 percent yields on investor sentiment:

Tuesday June 19 – Spanish T-bill auction
Thursday June 21 – Spanish Bond Auction, EZ Finance Ministers Meeting, Merkel/Monti/Holland Rajoy mini-summit

Eurozone leaders and finance ministers are gearing up for this month’s EU leaders summit, which is where the real work needs to be done. The market hopes that Europe will create a banking and fiscal union that protects the entire region. How quickly and aggressively they respond will be determined by how much pressure the markets put on policymakers over the next 2 weeks. In the meantime, the German ZEW survey will be released tomorrow and given the current market environment and uncertainty leading into the Greek elections, we expect deterioration in sentiment.

USD: Holding Strong Ahead of G20 Statement

The U.S. dollar traded higher against all of the major currencies with the exception of the Australian and New Zealand dollars. By eliminating the near term risk of a Grexit, the Greek elections also removed the need for an immediate response from the G20. As a result, we expect no major reaction to the G20 communiqué, which will be released on Tuesday. Two months ago, G20 leaders agreed to increase the IMF’s war chest by $430 billion. China has already committed to be a big lender along with other emerging market nations. It is hard to believe that we are living in a time when emerging nations are bailing out developed ones. Nonetheless that is the case and the more money, the better. The EUR/USD will rally if the funds contributed exceed $430 billion. However with the U.S. keeping its pocketbook tightly closed this round, the contribution could fall short of target which would be killer for the EUR/USD. Growth and job creation measures will also be discussed and everyone will agree that more growth and jobs are needed. The strength of the U.S. dollar going into G20 could reflect expectations for a disappointment. Yet finding an immediate solution to Europe’s problems has become no less critical because the rise in Spanish bonds yields tell us that the Europe’s debt problems far from over and the threat to financial markets remain. President Obama, whose election bid will be crushed by a deep collapse in the market will try to convince German Chancellor Merkel that an aggressive response to Europe’s debt crisis benefits everyone. The focus on Tuesday will shift to the Federal Reserve’s monetary policy announcement. The central bank is expected to extend operation twist and a full preview will be released tomorrow. In the meantime, building permits and housing starts are due in morning – neither should have a major impact on the U.S. dollar.

GBP: Inflation is Important to the Bank of England

Like the euro, the British pound traded lower against the U.S. dollar on continued concerns about Europe’s debt troubles. While this is a big week for the U.K., the economic calendar is light today, leaving everyone’s focus on the euro. However starting tomorrow, the U.K. will share in the limelight with consumer prices scheduled for release. CPI growth is expected to ease significantly in May due to lower commodity prices and weaker global demand. Producer price growth declined across the board but an increase shop prices make this call a tougher one. Nonetheless, inflation is a very important input into the Bank of England’s monetary policy announcement, which is something we will also learn more about this week. On Wednesday, the BoE releases the minutes from its latest MPC meeting and the outlook for the British pound hinges on how many members voted in favor of more easing. We are moving into a period where many central banks are thinking about easing and the BoE could be one of the first to get the ball rolling on more QE. If CPI growth falls short of expectations, expect the GBP/USD to make a U-turn back towards 1.55. Hotter CPI on the other will lend support to the currency pair, keeping it above 1.56.

AUD: Looking to RBA Minutes for Clues on Central Bank’s Dovishness

The Australian and New Zealand dollar strengthened against the greenback while the Canadian dollar weakened as Greek pro-bailout parties won favor in the Parliament. Australia is experiencing a once-in-a-century mining surplus that is assisting the country into tapping its emerging markets for economic growth. Demand for coal, iron ore and natural gas is increasing as their major export partner, China, continues to move towards developed nation status. Combined with healthier finances, Australia’s AAA rating has become increasingly attractive to foreign investors looking for a place to park their money. Prime Minister Julia Gillard pledged to drive down government debt and return it back to surplus. The Canadian dollar on the other hand weakened on growing concerns about U.S. growth. Tonight the RBA will release its minutes from the June 5th meeting. Since the market is looking for at least another 50bp of easing from the RBA, the tone of the minutes will be very important in confirming or denying that. Tomorrow Canada will release Wholesale Sales and New Zealand will release its Current Account Balance and Deficit-GDP Ratio. The Current Account Balance is expected to show a deficit of -1.145B. The Deficit-Ratio is forecasted to worsen from its previous release to -4.6%. At 20:00 ET / 0:00 GMT Australia will be releasing its Conference Board Leading Index and Dwelling Starts on 21:30 ET / 1:30 GMT. Dwelling Starts are expected to improve in its first quarter from -6.9% to -2.3%.

JPY: Little Consistency in Price Action

The Japanese yen strengthened against the EUR and CHF but weakened against the USD, GBP, AUD and NZD. The Nikkei 225 Index rose up 151 points today after concerns of Greece dropping out of the Eurozone eased as parties supporting Greek bailout won enough seats to control parliament. The rising pressure for Merkel to contain the Euro crisis caused the euro to weaken against the dollar and yen while the yen weakened against its US counterpart. The release of May’s data for Tokyo Condominium Sales (YoY) showed demand for apartments dropping from 81.7% to -14.9%. While the data was not significant enough to move the markets at 1:00 ET / 5:00 GMT the BoJ will release its Monthly Economic Report which could be a larger market mover. Tonight Nationwide and Tokyo Department Sales Store Sales will be released along with the Leading Index and Coincident Index data.

Talking EUR on the Business News Network

Kathy Lien
Managing Director

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