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Euro and Pound Climb Higher Ahead of Central Bank Decisions
German factory orders declined by 2.3% in April, the biggest decline in five months and disappointing expectations for only a 1% decline. Factory orders declined 0.4% from April 2012, according to the Federal Statistical Office.
The Euro did not react significantly to the disappointing data, and EUR/USD has risen 0.18% over the course of today’s trading session. The pair may see further volatility today following the ECB’s rate decision and the ensuing press conference with President Draghi.
Also in the Euro-zone today, Spain sold bonds for 4.02 billion Euros versus a 4 billion Euro maximum target. Ten year bonds were sold for a 4.517% yield versus 4.452% on May 14. Additionally, Greece unemployment was reported at 26.8%.
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Euro’s Recent Gains in Question amid Soft Economic Docket
The Euro finished squarely in the middle of the currencies covered by DailyFX Research this week, dropping -1.26% against the reinvigorated Japanese Yen (having recovered from losses from as great as -3.41%), while gaining +1.66% against the US Dollar (having given back gains from as great as +2.36%). Mainly, the Euro’s gains were following through from the prior week, when the EURUSD broke out of a bullish technical congestion pattern.
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US Dollar Looks for Cues in Fed-Speak, Aussie Hits 20-Month Low
The US Dollar outperformed to start the trading week, rising against all of its major counterparts, as Asian markets responded to last week’s slightly better-than-expected US employment report. When the report initially crossed the wires on Friday, traders that feared an upside surprise might hasten the Fed’s hand cheered on the result, with a swell in risk appetite pulling Treasury yields higher and offering support to the greenback. Overnight performance appears to reflect follow-through on the same dynamic, with Japanese shares leading regional bourses higher. This in turn put pressure on the anti-risk Yen.
It was the Australian Dollar that bore the brunt of USD gains however in the wake of ominous Chinese economic data released over the weekend. Beijing reported that exports grew just 1 percent year-on-year in May, marking the smallest increase in 10 months. Separately, Industrial production growth unexpectedly slowed and new Yuan loans tumbled to a three-month low. Investors projected signs of slowdown in the Chinese economy onto Australia – which counts on the East Asian giant as its largest trading partner – and took them to argue for a greater chance of an RBA interest rate cut at the July policy meeting. The probability of a 25bps reduction is now priced-in at 53 percent according to data from Credit Suisse.
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Euro Rises as Merkel Says Government Will Argue Before Court in Favor of OMT
Despite opposition by ECB member and Bundesbank head Weidmann, the German government supported the ECB’s decision to start the program. German Chancellor Merkel said today that the government will argue in front of the court in favor of the OMT program. The court will also review the ESM permanent bailout fund for the Euro-zone.
Federal Constitutional Court President Vosskuhle said today that the success of the OMT program doesn’t prejudice legal issues, as ends don’t justify the means. However, there is little expectation that the court will block the OMT program, but there are worries that it may limit the amount of bond purchases.
However, there seems to be little worry about the repercussions of the court review, as the Euro is trading 0.25% against the US Dollar in today’s Forex market at the time of this writing. EUR/USD may next see resistance at a 3-month high set recently at 1.3306, and the broken resistance line around 1.3200 may now provide support.
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Yen Rally, Aussie Selloff to Continue as Risk Appetite Unravels
The Japanese Yen soared while the Australian and New Zealand Dollars underperformed as risk aversion gripped financial markets in overnight trade. The MSCI Asia Pacific regional benchmark stock index fell 0.7 percent as the Bank of Japan opted to maintain its monetary policy stance unchanged, with the policy statement carrying no mention of recent market volatility much less any measures to address it. Traders seemed to be hoping for an increase in the size of ETF and J-REIT purchases and/or a change in funding terms to help stabilize asset prices.
European markets seem to be pressing ahead with risk-averse cues noted in Asia. USDJPY and AUDUSD accelerated lower anew, sinking alongside S&P 500 futures after a brief respite in late overnight trade as European bond trading came online at 6:00 GMT. The region’s stock exchanges have now joined in the selloff as well, trading down nearly 1 percent on average. A lackluster set of economic releases on tap in the US follows a quiet outing on the data front in Europe, suggesting there is relatively little out there to derail established momentum.
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The Japanese Yen was the top performing currency this past week, gaining +3.45% against the US Dollar, with the USDJPY closing at ¥94.10, the lowest level since April 4, the day the Bank of Japan announced its sweeping QE measures that ultimately propelled the pair through 100.00 within four weeks. Although the Yen weakened through Monday following the May US labor market report beat on June 7, the BoJ’s policy meeting on Tuesday failed to produce the necessary result to put the Yen back on the schneid: measures to address recent JGB volatility.
The BoJ’s May meeting Minutes released on Thursday, although containing stale information from the pre-Nikkei rout period (which began on May 23), showed that the central bank wasn’t concerned at all with pending volatility in Japanese financial instruments. However, in what was prescient commentary, at least one member said that recent policies risked provoking volatility in bond markets due to unrealistic expectations. This view was met with opposition that the BoJ’s large scale asset purchases would keep downward pressure on yields. At this point, we know now that this single member was correct; but the collective opinion reigns, meaning that no new measures should be expected - and that any short-term liquidity measures would more-or-less amount to a Japanese-styled LTRO (of the ECB in December 2011 and February 2012), which may not be enough to end recent anxiety.
Dollar Suffers Repeat of Worst Week in 17 Months Ahead of Fed
The Dow Jones FXCM Dollar Index (ticker = USDollar) dropped 1.3 percent for the second week in a row. The matching declines are the worst for the greenback since last January and the four-week tumble is the longest run of pain since September. This benchmark currency is at serious risk of seeing its impressive – counter risk – bull trend fully reversing course. However, Wednesday’s FOMC rate decision will be the judge of this possible misfortune. Much of the greenback’s more recent gains – particularly the May rally – was founded on premature ‘Taper’ speculation. The possibility that the Fed could throttle back on addictive stimulus threatened to undermine the unprecedented risk appetite drive and thereby leverage the greenback’s safe haven status. Yet, investors seemed to recognize that they got ahead of themselves with the June slump reflecting the Fed’s loose consensus to wait a few months to act. That said, speculators may not be reassured if they simply avoid a cut to the QE3 pace this month. A clear warning of an impending Taper within the next few months could just as effectively spark an implosion.
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