EUR/USD
The Euro initially stabilised against the US dollar during the European session on Friday and nudged higher early in the US session as risk conditions attempted to stabilise and there was a more robust round of short covering late in the US session. After very sharp losses the previous day, there was a strong rebound in Bankia’s shares which helped underpin the Euro to some extent. There was still a high degree of underlying fear surrounding the Euro-zone banking sector and there was still a very important focus on Spain despite Bankia’s rally. There were no major data releases during the day, but Spain revised its budget deficit estimate higher for 2011 which had a negative impact.
There were reports that the EU Commission and ECB were drawing up contingency plans for a Greek Euro exit. There was a reluctance to maintain aggressive short Euro positions ahead of the weekend, especially with the G8 Summit which helped underpin the currency and it rallies to the 1.2780 area with a squeeze on short positions.
German Chancellor Merkel floated the idea of a Greek referendum on continuing Euro membership which contributed to tensions between Greece and Germany . There were mixed opinion polls surrounding the Greek election with New Democracy and SYRIZA leading different surveys.
The G8 Summit communiqu? affirmed that there was interest in Greece staying in the Euro which was hardly a ringing endorsement and the evidence of divisions continued to fuel expectations of a Greek Euro exit. There was some speculation that market sentiment was shifting and that there could be a rally in risk appetite if Greece finally does exit the Euro, especially if there is a greater focus on growth-orientated measures. There was also some speculation that the Fed could move closer to additional quantitative easing.
The latest positioning data recorded a record net Euro short position which maintained the potential for a squeeze on positions and the Euro pushed above 1.28 on Monday before drifting weaker.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to make an impression on the yen in Europe on Friday with gains capped below the 79.50 region. There was a test of support close to the 79 level late in the US session.
The yen continued to gain defensive support from an underlying deterioration in risk appetite. In this context, the yen maintained a generally firm tone even when the Euro rallied. There were important doubts surrounding the Asian growth outlook which also helped support the yen.
Markets will remain on high alert over any potential Bank of Japan intervention and there was also caution ahead of Wednesday’s monetary policy decision given the potential for further policy action. Regional currency policies will remain important and there will be speculation that a slowdown in demand will increase resistance to any currency gains.
Sterling
Sterling initially remained under pressure against the dollar in Europe on Friday, but it avoided a decline to fresh two-year lows and was able to regain ground later in the US session with a move to 1.58 supported by a wider Euro recovery. The UK currency lost ground against the Euro with a move to the 0.8080 level.
Bank of England MPC member Posen, who will be leaving the bank at the end of August, stated that he may have been too optimistic over the UK outlook and premature in reversing his call for further quantitative easing. The comments increased speculation that the MPC could move towards additional bond purchases. In this context, Wednesday’s minutes will be very important for Sterling sentiment.
Although UK benchmark bond yields stayed close to record lows, there was additional speculation that the currency would find it difficult to secure further gains solely on defensive grounds, especially as underlying selling interest on valuation grounds would increase.
Swiss franc
The dollar hit tough resistance close to 0.95 against the franc on Friday and retreated steadily to lows just below 0.94 late in the US session on Friday. Although the Euro rallied firmly against the dollar, it was unable to make any impression on the Swiss currency and remained trapped near 1.2010.
The banking sector will remain an extremely important focus with speculation that there will be additional defensive flows into the Swiss currency, especially if fears surrounding the Euro-zone financial sector intensify with markets looking for any further comments from the National Bank on its exchange rate policies.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar found support close to 0.98 against the US currency on Friday and initially rallied back to the 0.9880 region. Significantly, the currency was unable to gain further benefit from a wider Euro rally later in the US session and weakened back to the 0.9840 area.
There were further concerns surrounding the regional growth outlook which undermined demand for the Australian dollar, especially with concerns that Chinese demand was weakening, and underlying risk appetite was also fragile. Equity markets attempted to rally during the Asian session on Monday which helped the Australian dollar find further support in the 0.98 area against the US currency.
