At the time of writing EUR/USD trading was around 1.2580 with lows of 1.2523 and highs of 1.2613.
Early this week the euro continued to defend its levels above 1.25. On Tuesday morning, however, EUR/USD was already manifesting signs of exhaustion, as investors were on ‘wait and see’ mode eyeing the outcome of further Greek and Spanish auctions tapping at liquidity markets. Greece was seeking to raise €1.25 billion through 26-week treasury bills, while Spain is aiming to raise between €2 billion to €3 billion in 15-year bonds during the week. It has been reported that China has already shown interest in the Spanish bonds due to be issued.
Early last Tuesday, Moody’s rating agency downgraded Portugal’s credit rating to A1 from A2 with a stable outlook. This news weighed on the euro and it exacerbated concerns for eurozone debt while markets were waiting for the outcome of the Greek auction late morning Tuesday. The downgrade brought new concerns for the upcoming stress test results due next week as well.
Later on Tuesday morning, Greece managed a successful sale of €1.25 billion of treasury bills at 4.65 per cent, with a bid-to-cover ratio at 3.64 as opposed to the 7.67 seen in a previous auction. Currency traders were expecting any rate below five per cent to be positive. This helped the euro regain some of its lost ground close to midday last Tuesday. Also on a positive note for the euro, in Europe’s biggest economy, i.e Germany, figures released lately revealed increased levels of manufacturing production and decreasing unemployment which undoubtedly continued to contribute to the euro’s increased support lately.
On Monday, China confirmed its stance for tough property measures. Government ministries signalled policy tightening would proceed in the near future – markets reacted negatively as there were hopes these measures would be relaxed. The Housing Ministry said it would be supporting household consumption while striving to curb investment and speculative property purchases.
In the US, the Corporate earnings session officially started last Monday, with Alcoa (a metals producer) in after-hours trading reporting better than expected earnings per share. Alcoa positively surprised markets with a modestly bullish outlook for the global aluminium market and upward revision of its global aluminium forecast. In a market dominated by bearish sentiment one can understand the notable expectation for these corporate earnings – investors are increasingly on the look-out to grasp some news that might alleviate investor pessimism on the global outlook. US corporate earnings could be a trigger.
In a release, Richmond Fed President Lacker acknowledged that economic recovery in the US would be choppy, and he also noted that further easing by the Federal reserve “is very far away”. Lacker also commented on the housing market saying he was not expecting a dramatic deterioration. In a separate release another member of the Federal Reserve’s board of governors highlighted the importance of boosting small business credit to sustain the recovery further. The lack of credit growth globally remains a key issue for policymakers worldwide.
In the UK, Financial Services Minister Mark Hoban, in an address to the British Bankers Association, said the government now had the opportunity to show the public that the banking system would be operating responsibly, not to leave taxpayers exposed to longer term risks – and that reforming the remuneration system would be a good way to regain public trust.
The British government is expected to publish a consultation paper for the introduction of a bank levy soon. The head of the BBA, Angela Knight, warned the British government that imposing regulation which was not also adopted globally would create comparative disadvantages for the UK.
Last Sunday, Japan’s ruling party, the Democratic Party of Japan lost its majority in an election in the upper house of parliament. This boosted political uncertainty due to the possibility of political deadlocks and the constrained ability to properly deal with deflation and huge budget deficits. On the back of this news, the JPY was losing support. Even though the DPJ still has a majority in the lower house, analysts are expecting this uncertainty to weigh on the JPY. Fitch also commented that the lost majority will make it harder for fiscal consolidation to be achieved unless Japan manages a credible fiscal plan.
On a lighter note, now that the World Cup is over, and seeing that Paul the Octopus’s predictions have held well, maybe we should ask Paul to shed some light on the future and shape of this economic recovery!
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Upcoming FX Key events:
Today: US producer prices
Tomorrow: EZ trade balance; US consumer prices and University of Michigan preliminary confidence
FX Technical Key points:
EUR/USD is bearish, target 1.1850, key reversal point 1.3000.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4000, key reversal point 1.5500.
USD/CHF is bullish, target 1.2000, key reversal point 1.0500.
AUD/USD is bearish, target 0.7800, key reversal point 0.9100.
NZD/USD is bearish, target 0.6200, key reversal point 0.7250.
Mr Muscat is senior trader at RTFX Ltd.
www.rtfx.com