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Spain admitted that its banks need help
Spain has finally stopped its unbending rejection of external funding to assist the bank recapitalization. Rumor has it that the indebted country’s government is currently negotiating with EU leaders. This week Germany has nearly forced Spain to accept help from the European Stability Facility to support its banking system. Both Germany and Spain stand for the creation of a banking union within a framework of which the European stability funds will be able to finance the banks directly.
However, according to Spanish Economy Minister Luis de Guindos, Spain is not planning to request a bailout of its banks before the results of an IMF report (June 11) and further reports from independent auditors (end of June). On basis of this information the Spanish government will take further anti-recessionary actions.
Photo: Reuters
June 7: economic background and currencies
The risk sentiment was rather positive. Asian stocks rose (MSCI Asia Pacific Index +1.5%). Japanese yen has broadly weakened on lower demand for safe havens.
Australia has made a contribution to reviving the risk appetite. The nation’s economy added 38.9K jobs in May after a 2.2K contraction in April and a 7K growth forecast. Unemployment rate increased in line with expectations to 5.1% from 5.0%. Aussie is strengthening for the fourth consecutive day. In general the country’s recent economic data is positive for the currency: the rate cut on Tuesday was less than some expected, while nation’s GDP surprisingly grew by 1.3%.
The greenback is under pressure ahead of Ben Bernanke’s testimony as many think that the Fed's Chairman may signal further stimulus in order to help US economy recover. The Federal Reserve’s Vice Chairman Janet Yellen, a well-known dove, claimed yesterday that American economy “remains vulnerable to setbacks” due to slowing job growth and deteriorating financial-market conditions and may warrant additional monetary stimulus. San Francisco’s FRB president John Williams and Atlanta’s Dennis Lockhart also talked about possible need for an action, saying their level of concern had risen since the Fed's April meeting. Read more on the Fed’s policy here.
The single currency has managed to break out of May downtrend channel and settle above $1.2500 as the short-term players trimmed euro shorts on the hopes of more policy action, both in Europe and the United States. EUR/USD rose to $1.2585, about 2.3% above 2-year minimum of $1.2288 hit last week.
However, trading will remain quite volatile, with risk assets vulnerable to declines. Uncertainty will stay high until there’s a solution of banking and sovereign solvency problems.
Events to watch today:
Britain: Bank of England’s MPC meeting.
Euro area: Spanish and French 10-year bond auctions.
US: unemployment claims.
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2420, $1.2420, $1.2500, $1.2525 (large);
EUR/GBP: 0.8040, 0.8050, 0.8060, 0.8100;
USD/JPY: 78.50, 78.70, 79.00, 79.50;
EUR/JPY: 99.00;
AUD/USD: $0.9800.
Scotiabank: short- and long-term outlook for loonie
Analysts at Scotiabank revised down the near-term outlook for Canadian dollar due to deteriorated growth prospects of China and India and euro zone’s debt problems. According to the bank, the pair USD/CAD will keep gaining towards the end of the month and current quarter.
However, the specialists think that in the longer term the outlook for loonie will significantly improve once risk aversion and the rapid flow into US dollar denominated assets subside.
In their view, CAD will strengthen against its US counterpart in the second half of 2012. Scotiabank underlines that the Bank of Canada is likely to hike interest rates long before the Fed, the ECB or the Bank of Japan. In addition, Canada still has top credit rating and developed bond market – these factors will support demand for loonie. The analysts expect USD/CAD to slide to 0.9900and by the year-end.
Chart. Daily USD/CAD
RBC, Westpac: RBA rates and forecast for Aussie
The Reserve Bank of Australia cut its benchmark interest rate by 25 bps to 3.5% this week getting close to the 3% level set after the global financial crisis has hit the fan. Many analysts expect the RBA to reduce the borrowing costs more this year citing deteriorating global economic prospects.
RBC: “We’re looking for at least one more cut, but our rates outlook is under review at the moment … and clearly the risk is that terminal cash ends up below 3.25% .”
Westpac: the RBA would cut rates again in July, in August and in December, taking the cash rate to 2.75% by the year-end. “Relative to the May [cuts], there has been a series of observations … that suggest to us that the [Reserve] Bank is prepared to cut rates significantly further.”
Westpac expects AUD/USD to slide to 0.9600 by September before returning above the parity by the end of 2012 line with a pull-back in the USD index due to the monetary stimulus policies in Europe, China and the US, particularly in Q4. “The combined effects will reverse the negative dynamics current swirling around Aussie,” say the specialists. According to the bank, AUD/USD will reach $1.0200 by the end of the year and moving even higher in early 2013, before leveling out at mid-year in the $1.0500/0600 area.
Chart. Daily AUD/USD
EUR: how long will the strength last?
The EUR/USD cross bounced from its two-year low (June 1) and broke through the strong $1.25 resistance level. The pair is pushed up by the prospects of the additional QE in the US, the words of the ECB President Mario Draghi that the market underestimated the political decision of the EU to preserve the currency block and the results of the Spanish and French bond auctions.
Strategists at BMO forecast the EUR/USD to reach $1.2625 (Jan. low), while analysts at Nomura expect the pair to bounce to $1.2700. The nearest resistance for the pair lies at $1.2600 (psychological level) and $1.2690 (38.2% retracement of May 1-June 1 drop).
However, in long-term most analysts remain bearish on the prospects of the common currency. The euro is expected to decline against the greenback as the EU leaders struggle to resolve the crisis. Moreover, economists expect that Germany will finally agree on the Eurobonds issue in order to support the peripheral countries. In case European politicians fail to compromise, the market situation will definitely worsen: massive outflow of capital out of the region is expected. Draghi said the ECB will continue to supply euro zone banks with the liquidity they ask for in the refinancing operations at least until early 2013.
Chart. Daily EUR/USD
SocGen, RBS: comments on EUR/GBP
Analysts at Societe Generale note that the single currency has made something like a U-turn 2 weeks ago as it rose from 0.7950 (May 16 minimum) to the levels in the 0.8100 area this week. The specialists point out, however, that EUR/GBP is facing resistance at 0.8130 (50-day MA). If the Bank of England doesn’t deliver monetary stimulus today, euro may get under renewed selling pressure. In addition, the bank underlines that the pair isn’t oversold now, while there will likely be more negative news from the euro area. As a result, SocGen regards bearish risks as quite high.
Strategists at RBS claim that EUR/GBP may get stuck in the 0.7950/0.8221 area. In their view, resistance for the pair lies at 0.8142 (May 3, June 5 maximums), 0.8192/97 (May 1 maximum) and 0.8222 (April 25 maximum), while support is found at 0.8063 (gap opening), 0.7950 (2012 minimum) and 0.7695 (2010 minimum).
Chart. Daily EUR/GBP
SNB increased currency reserves
According to the Swiss National Bank statement, the SNB’s foreign currency reserves reached a record high in May (303.8 billion Swiss francs from previous 237.6 billion francs).
The regulator attempts to defense the franc floor under the conditions of the uncertainty in the euro zone. It is necessary to note, that the 1.20 threshold protects the franc from excessive strength as a safe haven currency and supports the Swiss economy.
Analysts at Bank Sarasin underline that the SNB will be forced to intervene if the euro zone’s situation worsens. However, according to analysts at ING Group, for the moment there is no reason to believe that the floor could be broken even under higher pressure.
BoE left policy unchanged… for now
The Bank of England decided to leave its monetary policy unchanged: the benchmark rate remained at 0.5%, while the size of the asset purchase program was left at 325 billion pounds.
UK central bank was under serious pressure to do more stimulus as British economy has entered official recession and is affected by the European debt crisis. The nation’s GDP contracted by 0.3% in the first 3 months of the year. In addition, manufacturing activity plunged in May in the sharpest fall since November 2008. So, the market had reasons to expect more easing from the BoE.
At the same time, the story isn’t clearly over yet: there are a lot of events ahead which concern Europe, Britain’s main trading partner. The matter is about Greek elections and the decisions which the region’s authorities will have to make afterwards. So, as with the European Central Bank the focus turns to the next BoE meeting in July and analysts at ING Bank expect further stimulus.
British pound showed the second day of solid gains versus the greenback and retraced more than 50% of last week’s slump. GBP/USD rose from Friday’s minimum at $1.5233 to the levels in the $1.5670 area, above the previous weekly maximum of $1.5515.
Chart. Daily GBP/USD
June 8: economic background
The day has begun with a risk-off trade as potential gains on the unexpected Chinese interest rate cut quickly evaporated after the Fed’s Chairman Ben Bernanke didn’t signal further monetary stimulus yesterday.
On Thursday China cut its interest rates for the first time since 2008, attempting to defend the export-oriented economy from the euro zone’s turmoil. The move may mean that the economy is weaker than expected. Tomorrow watch for inflation report, investment and output figures –traders are now worried that the figures may be quite disappointing.
Asian stocks declined (MSCI Asia Pacific Index +1.3%), commodity currencies weakened. Japanese yen strengthened versus all of its main counterparts The Dollar Index rebounded from almost 1-week minimum.
Yesterday Japan’s Q1 GDP was revised up to +1.2% (q/q). USD/JPY declined today, though the pair retains weekly gain as the Bank of Japan’s expected to announce more easing next Friday (June 15). Analysts at Westpac think that the BOJ will be the first among the 2 central banks (the BOJ, the Fed) to ease policy, so this may provide support for the greenback.
Commodity prices and Chinese slowdown still have an impact on the Australia’s trade, but improvement could be on the way: Australia’s trade deficit declined from 1.28B Australian dollars in March to 0.20B in April. According to RBA Governor Glenn Stevens, the economic situation in the country is much better than in other economies. Stevens didn’t give any hints on the future monetary policy easing. Moreover, he underlined that the previous easing was not supposed to create speculative demand for Australian assets. AUD/USD is down in the $0.9850 zone after testing the parity yesterday.
The single currency eased down from $1.2625 (January minimum, June 7 maximum) to test the levels below $1.2500. German trade surplus exceeded the forecast of 13.3B euro posting 16.1B euro in April, up from 13.7B in March. The positive figures provided some support for EUR/USD, but not much as the debt woes are still hovering over the region.
There’s a bunch of important Canadian data (housing, employment and trade) as well as US trade balance released later today.
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