EUR/USD
The Euro was subjected to renewed selling pressure in Europe on Wednesday with a re-test of 2012 lows below 1.2640. The Greek situation inevitably remained an important focus as tensions remained higher following former Greek Prime Minister Papademos’ comments that a Euro exit was a real risk. There were further reports that key institutions were making contingency plans for the Greek exit and the barrage of rhetoric continued as the Bundesbank stated that a Greek exit was manageable.
The German 2-year bond auction recorded a yield decline to 0.07% from 0.14% previously, a fresh record low for yields with investor demand holding firm. There were further fears surrounding capital outflows from weaker Euro-zone countries on contagion fears and an uncontrolled Greek exit which continued to undermine the Euro.
Selling pressure intensified during the New York session with the Euro dipping to below the 1.26 level for the first time since August 2010 with lows just below 1.2550. There was also evidence of increased stresses within the inter-bank lending markets as it became more expensive to secure dollars. There was also wider dollar demand as emerging-market currencies generally remained under pressure. US new home sales increased to an annual rate of 343,000 from a revised 332,000 previously which did not have a major impact with market attention focussed elsewhere.
Late in the US session, there were some reports that EU leaders could move towards a deposit-guarantee scheme for banks which provided some relief to sentiment and the Euro moved back to the 1.2580 region. There will also be speculation that global central banks will look to alleviate funding stresses which would provide a brief lift to risk appetite. EU Leaders did not announce any significant initiatives at the Summit as Germany remained opposed to Eurobonds and the Euro was unable to gain any sustained relief.
Source: VantagePoint Intermarket Analysis Software
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Yen
The yen continued to draw defensive demand during the European session with particular demand against the Euro. As stop-loss levels were broken, the dollar dipped to lows near 79.20 while there was a Euro slide to below the 100 level for the first time since January.
The yen continued to gain support from a deterioration in risk appetite despite an important lack of confidence in the Japanese economic fundamentals. Bank of Japan Governor Shirakawa was also cautious over the potential for further monetary easing.
Risk conditions remained extremely cautious on Thursday with no support from the China HSBC manufacturing PMI index which recorded the 7th successive figure below the 50 benchmark level and the dollar consolidated near 79.50.
Sterling
A stronger dollar put Sterling on the defensive during European trading on Wednesday and it dipped to lows below 1.57.
The Bank of England minutes recorded a unanimous vote to hold interest rates at 0.50% while there was an 8-1 vote to keep quantitative easing on hold with Miles voting for additional action. Several members did, however, state that the case for additional bond purchases was very close. These comments, allied with a decline in growth forecasts, reinforced speculation that the bank would move to additional measures in June.
The retail sales report was sharply weaker than expected with a 2.3% monthly decline for April, the weakest report for over two years as sales retreated from an artificial boost in March. Underlying vulnerability was illustrated by a 1.1% annual fall as incomes remained under pressure. The latest CBI industrial orders index also weakened to -17 from -8 the previous month.
Sterling found support in the 1.5680 region with further selling pressure alleviated by demand against the Euro as there was a test of the pivotal 0.80 level.
Swiss franc
The dollar initially dipped back towards the 0.9480 area against the franc on Wednesday before finding strong buying support with fresh 2012 highs around 0.9570 during the New York session as the franc remained firmly tied to the Euro.
Safe-haven considerations inevitably remained very important during the day as the Euro stayed under pressure. There was further speculation over capital flight from the Euro area, especially with reports of capital flows from the peripheral economies. The inability to forge any fresh Euro-zone solution maintained upward pressure on the franc.
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Australian dollar
The Australian dollar was subjected to heavy selling pressure during the European session on Wednesday with an initial test of support near 0.9730. After a temporary respite, there was intense selling which pushed the currency to 2012 lows below 0.97 before a tentative recovery.
The currency was again undermined by a deterioration in risk appetite as confidence in the global growth outlook continued to deteriorate. The currency continued to recover from over-sold conditions in Asia on Thursday, but there was no significant support from the Asian economic data or general tone surrounding risk appetite.
