Currency Markets Jittery as EU Summit Looms

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Market Movers June 25, 2012
Markets jittery at start of week as EU summit looms
USD/JPY gives up its gains dropping below 80.00 as US Treasury yields slide
Nikkei off -0.72% Europe -1.96%
Oil below $79/bbl
Gold $1568/oz.

Asia and Europe
No Data

North America
USD Chicago Fed Nat Activity Index 8:30
USD New Home Sales 10:00

A very quiet opening to the week in FX tonight, with no economic data on the calendar and a decidedly negative tone to the session as credit concerns resume in the European markets with Spanish 10 year bond yields rising above the 6.5% level. The EUR/USD has slipped below the 1.2500 level with focus turning to the EU summit on Thursday and Friday weighing over the market like a dark cloud.

As many analysts have noted Europe needs a common bond issuance in order to mitigate the risk of sovereign credit default and some sort of pan-European bank deposit protection plan in order to avoid the chronic bank runs that are beginning to plague the Southern European economies. Although the prospect of Eurobonds is highly unlikely to make the agenda given Germany’s adamant opposition towards an open ended extension of its balance sheet, the bank deposit issue could be considered seriously given the need to stem the capital bleeding from Southern European banks.

Ahead of the summit however, the capital markets remain highly skeptical that policy makers will produce some sort of breakthrough solution and the warning from George Soros that a failure to tackle these problems could spell doom for the euro has only served to exacerbate already jittery markets with EUR/USD breaking to new session lows as the morning progressed.

The pressure on risk has weighed on the Aussie as well as the pair finally gave up the 1.0000 level after holding support there for most the night. Australia has a very quiet calendar this week, but could come under pressure if risk aversion flows pick up with .9900 and then .9800 both in view if market sentiment turns decidedly sour on the EU Summit.

In North American today the docket only carries New Home sales with markets anticipating little change from last month 343K readings. USD/JPY has unwound a large part of its gains in Asian and European session today, falling below the 80.00 barrier once again as US Treasury yields slip in early morning trade with 10 year benchmark at 1.6355% versus 1.6605% earlier. The slide in US yields along with selling pressure in EUR/JPY could continue to weigh on yen crosses but as we noted earlier, USD/JPY may be undergoing a transformation in assessment by the market with yen losing some it luster as a safe haven bid in light of political uncertainty at home and lack of capital generation abroad. Still the 79.50 level remain key and if it is is broken to the downside it could once again destroy the bullish thesis on the pair forcing longs to bail out once again

Boris Schlossberg
Managing Director

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