The euro failed to find support earlier this week even though one would think that the aid package to Greece, determined over the weekend, would at least settle the sovereign default worries.
The relief was short lived because the euro still lost support to most of its major counterparts on worries of eurozone fiscal troubles.
On Tuesday the euro fell to new yearly lows towards the 1.30 level against the US dollar. EU-IMF aid to Greece consists of €110 billion over three years. It was also agreed that the first funds would be released in time for the next bond maturity due May 19. In exchange Greece has agreed to a large fiscal adjustment over three to four years.
EU member states will provide €80 billion, while the IMF will offer the rest. Funds will be released in instalments to coincide with quarterly progress reviews. Given that the motivation for the large bailout was mainly to contain contagion to other eurozone countries, markets will be eyeing the ones most at risk, in the forefront Portugal and Spain.
Euro lows are understandable given good data from the United States on one side and never ending concerns on the Greek crisis on the other. It is not only Greek aid concerns that weighed on the euro. Tuesday morning data for German retail sales were up 2.7 per cent Y/Y but fell 2.4 per cent on a M/M basis, a sign that consumer sector continues to sag. In addition the US is widely expected to raise its interest rates ahead of Europe and Japan later on this year.
On Tuesday, amid signs that the economy is on a path to a sustainable recovery, the Reserve Bank of Australia raised its policy cash rate for the third time this year by 25bps to 4.5 per cent. Some analysts say it was a natural consequence of strong inflationary and housing data. Steady demand for Australian commodities has contributed considerably to the Australian economic recovery.
Over last weekend China tightened its required reserve ratio by another 50bp in an effort to cool down the property market and the economy in general; this move is expected to drain more cash out of the economy. In China a survey conducted by HSBC in association with Markit (a market research firm) reported on Tuesday a reading of 55.4 for the Purchasing Manufacturing Index (PMI) in April, compared to 57.0 in the previous month.
This moderate slowdown was seen as positive, as this was a signal that China's tightening policy might be starting to cool down an overheated economy - and this will help contain inflationary risk.
Trading was quite mixed till the first part of the week for the British pound. The pound gained against the euro, Swiss franc and Australian dollar, but was weaker against the US dollar, Japanese yen, New Zealand dollar and Canadian dollar. Supporting sterling is the fact that markets are looking at what will be the probable norm after the elections.
With uncertainty (linked to the general election today) out of the way, whatever the result, the government should be back to business, to tackle the ballooning debt load. On the other hand risks to the downside revolve on the fear of an uncertain election result.
The United States-China saga continues as the US International Trade Commission ruled last Monday that Chinese companies sold $ 2.8 billion worth of oil well drill steel pipes at unfairly low prices in the US. As a result an anti-dumping duty order will be issued on imports of these products from China.
All this comes amid disputes over China's huge surplus and the value of the yuan. Various United States' entities accuse China of keeping the yuan deliberately low to give a price advantage to Chinese exporters.
Upcoming FX Key events
Today: Eurozone ECB interest rate decision.
Tomorrow: US non-farm payrolls and the unemployment rate.
FX Technical Key points
EUR/USD is bearish, target 1.2885, key reversal point 1.3800.
USD/JPY is bullish, target 98, key reversal point 85.
GBP/USD is bearish, target 1.4750, key reversal point 1.5700.
USD/CHF is bullish, target 1.1000, key reversal point 0.9950.
AUD/USD is bearish, target 0.7800, key reversal point 0.9400.
NZD/USD is bearish, target 0.6200, key reversal point 0.7650.
Mr Bovay is senior trader at RTFX Ltd.
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