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EUR: rising concerns about Spain
Euro dropped versus its peers on the rumors that Valencia, Spain’s region, will ask for central government help to refinance its debt. Spanish 10-year yields climbed above 7%. The markets are extremely concerned about the situation in Spain, even though the euro zone’s finance ministers are expected to approve the bailout for the nation’s banks.
Illustration by Topos Graphics
EUR/USD tested the levels below $1.2200 and got some support around $1.2185. EUR/JPY hit 7-week minimum. EUR/GBP fell to the minimal level since October 2008.
Chart. H1 EUR/USD
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Events to watch on July 23-27
Are you prepared for the next week’s trade?
Monday, July 23
Australia: PPI is likely to increase by 0.3% q/q in Q2 after a 0.3% drop in Q1 - still this a very small gain. The release is especially important ahead of the CPI release on Wednesday.
Euro area: Consumer confidence. Economists surveyed by Bloomberg News predict that an index of household sentiment in the euro region was probably unchanged this month from June at minus 19.8, remaining close to 3-year minimum.
Tuesday, July 24
China: HSBC flash manufacturing PMI. In June the index came at 48.2, its lowest reading in 7 months.
Euro area: PMIs. A gauge for manufacturing in the currency bloc is estimated to be at 45.3 in July. That’s below the 50 level that separates expansion from contraction and compares with a reading of 45.1 last month.
Canada: Retail sales. Data release may cheer the investors up a little bit: according to forecasts, core retail sales increased by 0.2% m/m in May vs. a decline by 0.3% in April, while retail sales - to grow by 0.3% vs. a previous 0.5% drop.
Wednesday, July 25
Australia: Consumer prices probably grew 1.3% in Q2 y/y, what would match the slowest annual pace since June 1999.
Germany: Ifo Business Climate might paint a brighter picture of current business conditions, but it is likely to show that companies are losing confidence in the future.
UK: - Preliminary GDP (Q2). The figures are expected to confirm the fears that the UK is still in recession: British economy may have fallen by 0.2% (q/q). This would be the third successive quarterly fall, and would mean that GDP is lower now than it was in the third quarter of 2010, and 3.9% below its pre-recession peak.
- CBI Industrial Order Expectations. The index improved in June coming better than expected. If this data are confirmed, hopes will rise that the UK will recover in Q3.
US: New home sales will likely continue to improve, though from a very low base.
New Zealand: The RBNZ meeting. Currency markets will be waiting for the Reserve Bank of New Zealand rate decision. According to Credit Suisse data, traders appear to be anticipating a 95% chance of no change to the current benchmark lending rate. Annual inflation is holding at the lower end of the RBNZ's annual target band of 1-3%, increasing the chances that the bank will keep the cash rate at a record low 2.50 % level until summer 2013. The rate was last lowered in March 2011.
Thursday, July 26
Euro area: Private loans. The ECB data may show that bank lending to the private sector is stagnating. The European crisis is reducing banks’ ability to lend and companies’ willingness to borrow.
US: Durable goods orders may have increased 0.4 percent in June, less than the 1.3 percent gain in May. Pending Home Sales.
Friday, July 27
US: Advance GDP (Q2). Though US economy is doing better that the euro zone’ or the UK ones, economists expect it to add only 1.5% (q/q), showing the slowest growth pace since June 2011. In Q1 American economy increased by 1.9%.
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Der Spiegel: Greece may fail in September
Der Spiegel reports citing unnamed senior EU sources in Brussels that the IMF wants to stop providing financial aid to Greece as soon as the European Stability Mechanism (ESM) starts functioning in September.
According to Der Spiegel, Greece could become bankrupt as early as in autumn. It’s clear that Greek government won’t be able to bring down its debt load to about 120% of GDP by 2020. The Troika estimates show that that giving Greece more time to achieve its goals would cost additional 10-50 billion euro. However, many European economies are reluctant to pay for their troubled neighbor. In addition, countries like the Netherlands and Finland were providing as the IMF was involved.
The Troika officials will soon go to Athens to see whether Greece is doing enough to comply with the terms of its second international bailout and merit receiving the next tranche of funds. Last week Greek politicians were unable to reach agreement pushed back talks on cutting budget by almost 12 billion euros ($14.6 billion). The ECB adds pressure: on Friday the central bank said that it will no longer accept Greek bonds as collateral in return for funding, at least until the positive report of the Troika. On Saturday German foreign minister Guido Westerwelle ruled out the possibility of relaxing the conditions of Athens’ second bailout.
It seems that the EU and the IMF are finally ready to pull the plug on Greece. Euro zone’s nations think that the currency union would survive Greece’s exit. The ESM is meant to stop contagion in this case. German constitutional court delivers its verdict on the mechanism on September 12.
Grece. The impending doom.
Photo from minority-opinion.com
July 23: economic & forex news
The markets are in the risk-off mode amid the concerns that the European debt crisis is escalating. Asian shares are down. The greenback and Japanese yen have strengthened vs. the majority of their counterparts as the possibility of Greece’s leaving the euro area is getting higher and higher.
EUR/USD opened the week with almost 40-pip gap down touching fresh 2-year minimum at $1.2106. EUR/JPY hit 11-month minimum at 94.60 yen.
The sole data release today in Europe is the euro zone’s consumer confidence published at 14:00 GMT. According to the forecasts, the index will remain close to 3-month low. As for the debt auctions, Germany will offer short-term debt 06:00 GMT and France – at 10:50 GMT. Investors are more worried about tomorrow as Spain will auction 3- and 6-month bills. Spanish 10-year yields stay at the record maximums, above the critical level of 7%.
Note that demand for US dollar as everyone awaits US Q2 GDP figures on Friday. Economists expect American economy to add only 1.5% (q/q), showing the slowest growth pace since June 2011. Weak data will increase the odds of QE3, dollar-negative factor. Taking into account such prospects, yen may by the best performer in the coming months.
Elsewhere, Australian PPI rose by 0.5% in Q2 (vs. +0.3% expected). Japanese monetary authorities do their usual comments about their readiness to act with easing, but nothing more.
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AUD/USD: technical comments
It seems that the last week’s advance came to an end: AUD/USD declines on Monday for a second consecutive day, trading close to the $1.0300 level amid concern Europe’s debt crisis is worsening, reducing demand for higher-yielding assets. The Aussie opened the week with a gap down, but still remains in an upward channel and above a 200-day MA.
The pair was supported early Monday by a higher-than-expected PPI release, which came out at 0.5% vs. 0.3% expected (q/q) and 1.1% vs. 1.0% expected (y/y).
Resistance: $1.0320/28 (July 4-5 maximums); $1.0400 (psychological); $1.0443 (July 19 minimum); $1.0450 (April 12-13 double top); $1.0469 (April maximum); $1.0500 (psychological); $1.0557 (March 27 maximum)
Support: $1.0279 (200-day MA); $1.0280 (July 18 minimum); $1.0240 (July 10 maximum); $1.0201 (100-day MA); $1.0099 (July 12 minimum).
Chart. Daily AUD/USD
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CFTC trader positioning data
The latest Commitments of Traders (COT) report, released on Friday, July 20 by the Commodity Futures Trading Commission (CFTC), showed that on a week ended July 17:
The US dollar long positions increased to $25.8 billion on July 17 from a total long position of $24.58 billion on July 10, while the net short euro positions rose to 167.2K contracts from the previous week’s total of 166K net short contracts. Investors increased bets the Japanese currency will strengthen: the net long yen positions edged higher to 11.1K contracts following a total of 8.9K net long contracts the previous week. The British pound is still unpopular among the speculators: the net short pound positions declined by 1.3% this week. The net short Swiss franc positions increased to 23K contracts following 17.5K net short contracts the previous week.
Investors continued to bet that the Australian and New Zealand dollars will rise, with net long positions totaling $1.4 billion and $554 million, respectively. But the market changed its view on the Canadian dollar, now expecting the currency to fall, with a net $119 million wagered.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
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Draghi’s interview: EUR is not at risk
Here are the key points from ECB President Mario Draghi’s interview released over the weekend:
• “We are very open and have no taboos. We decided to lower interest rates below 1% because we expected that inflation would be close to or below 2% at the start of 2013. Now it is probable that it will come down by the end of 2012.”
• Draghi didn’t say that declining inflation would allow further rate cuts, but said that the ECB will act if it sees the risk of deflation.
• Draghi ruled out risk of recession in the euro area. The ECB is looking forward to gradual improvement late in 2012 or early in 2013.
• The survival of monetary union is not at risk, “euro is irreversible”.
• On Greece: the ECB would prefer the nation to stay, but it’s for the Greek
government to decide.
• Draghi urged euro zone leaders for structural reforms, more action at the European level and move towards financial, budgetary and political union.
Photo: AFP
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RBA's easing cycle's coming to an end
Analysts at Deloitte expect the RBA to cut the benchmark interest rate once more in this cycle if China can maintain its growth outlook. They point that the second largest economy in the world has recently taken measures to support the economy, but will the effect be long-lasting? Specialists say China’s efforts could soften the blow on global economy, but bad news from either Europe or China could spoil the outlook for the Australia’s economy.
According to analysts at NAB, the RBA is coming to the end of the interest rate easing cycle. Currency market is still expecting a 100 b.p. cut by mid 2013, but specialists believe a new rate cut could happen only in case of a euro zone melt-down. In their view, Australian dollar is to depreciate and inflation is likely to rise in a quarter or two. On a fundamental basis, the Aussie seems to be overvalued.
Photo: Bloomberg
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Ichimoku. USD / JPY. Week of July 23-27
Weekly USD/JPY
The greenback has posted 4 weeks of declines versus Japanese yen. This is another week which US currency has started on the downside.
USD/JPY has been staying within the weekly Ichimoku Cloud since the end of April. At the moment the prices are close to the lower border of Kumo which should provide them good support. In addition, there’s late May minimum in this area (77.65).
Also note that the Baseline (1) and the Conversion line (2) are horizontal which points at the possibility of the rate’s consolidation. In addition, the thin Cloud which has so far changed its direction several times shows that neither bulls, nor bears dominate the market.
At the same time, it’s necessary to note that this week will be marked with strong influence of the fundamental factors. In particular, US advance GDP is released on Friday – all eyes will be on this publication. It seems that investors are already tired of discussing the odds of QE3 and they are craving for the confirmation of their pessimism. Negative data could make US dollar breach support provided by the Cloud.
Chart. Weekly USD/JPY
Daily USD/JPY
USD/JPY has already tested the levels below 78 yen today – this level is regarded by many as the level of potential BOJ intervention.
On the daily chart the prices have gone through the lower part of the Cloud, but didn’t manage to overcome resistance provided by Kumo and rise to its upper border. The lines Tenkan-sen (1) and Kijun-sen (2) are directed downwards pointing at the downtrend. The bullish Cloud has shrunk to one point getting ready to change its direction. The pair’s prospects seem negative.
Chart. Daily USD/JPY
BNY Mellon: Spain will ask for full bailout
Analysts at Bank of New York Mellon claim that Spain may apply for bailout following Ireland, Portugal and Greece.
Spanish Prime Minister Mariano Rajoy confronts 15 billion euro of debt redemptions in Spain’s regions in the second half of this year. Valencia was the first region to tap a fund designed to help out Spain’s 17 semi-autonomous regions. Now Murcia is seeking aid as well.
Financial situation in Catalonia, Castilla-La-Mancha, the Canary Islands and the Balearic Islands also is very difficult.
Spanish 10-year yields rose to the record levels of 7.5%. The nation’s IBEX 35 is down 35% from its level a year ago. It’s clear that the bank bailout for Spain isn’t anough to deal with the country’s problems.
BNY Mellon: although Spain could live to see October, other members of the euro area afraid of contagion will push the nation to request bailout. Italian Prime Minister Mario Monti claimed that unrest in Spain dramatically increases concerns and makes Italian yields rise as well. Italian 10-year yields are above 6%. Spain’s Economy Minister Luis de Guindos will talk with German Finance Minister Wolfgang Schaeuble. No press conference is planned
Westpac: “Spain has lost access to markets but claims it won’t impact published debt raising plans. Investors don’t like it; they are losing faith in Spain’s ability to finance herself and can no longer trust what the political leaders across Europe.”
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