EUR/USD
The Euro was unable to regain the 1.30 level in early Europe on Wednesday and remained generally fragile during the session. The Greek political situation remained a key focus during the day with further attempts to form a coalition. The SYRIZA alliance continued to negotiate with other parties, but there was little sign of any progress with the New Democracy party insisting that a commitment to the bailout must continue and continued stalemate would risk fresh elections in June.
The scheduled Troika visit to Greece in May has been postponed until a government is formed and there was also some speculation that the latest EFSF loan payment due on May 10th would be delayed.
Within the wider Euro-zone, there were reports that the Spanish government was set to take a majority stake in Bankia with further capital injections into the banking sector as a whole and confidence in the Euro-zone remained extremely fragile. There were further capital flows into the German fixed-interest market as bund yields hit record lows.
Selling pressure on the Euro intensified following the break of support in the 1.2950 area and the currency dipped to fresh four-month lows just above 1.2910 before reports of option defence helped pull the currency off its lows. Later in the New York session, the EFSF confirmed that the latest loan payment would be paid on time and this helped trigger some limited short covering.
Regional Fed President Kocherlakota stated that monetary policy should start to be tightened within the next 6-9 months, but the impact was limited as he is not an FOMC voting member this year and the Euro consolidated below 1.30.
Source: VantagePoint Intermarket Analysis Software
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Yen
The yen continued to gain ground against the dollar in Europe on Wednesday with the currency boosted by safe-haven demand as risk appetite deteriorated sharply. The US currency was also undermined by a slide to US bond yields to the lowest level since February as 10-year yields dipped to below 1.8%.
Yen buying accelerated when key technical levels were broken and stop-losses were triggered with the dollar weakening to lows below 79.50 for the first time since February while the Euro tested lows below 103. Although pessimism eased slightly, there was disappointment at the latest Chinese trade data for April as import growth much weaker than expected at 0.3% which fuelled expectations of deteriorating growth conditions within China.
Sterling
Sterling hit resistance close to 1.6150 against the dollar on Wednesday and was subjected to significant selling pressure during the European session. Selling pressure continued in early New York with lows below the 1.61 level.
There was further evidence of defensive capital inflows into Sterling as a refuge from the Euro-zone stresses. The latest UK government bond auction recorded a significant drop in 30-year yields compared with the previous sale while there was an increase in the bid/offer ratio.
There was caution ahead of the Bank of England interest rate meeting on Thursday given the possibility that there could be an announcement of further quantitative easing. Markets overall expected that the bank would keep the amount of quantitative easing on hold and a decision to keep policy unchanged could provide a net boost to Sterling.
Sterling pushed to highs near 0.8010 against the Euro, the strongest level since November 2008, while the UK currency recovered back to the 1.6150 area against the US dollar. The currency may also be resilient on any further quantitative easing given potential defensive inflows.
Swiss franc
The dollar maintained a strong tone during the European session on Wednesday and spiked to highs near 0.93 before a retreat back towards 0.9250. With the Euro still trapped near the 1.2010 level, the US moves were correlated directly with moves in the Euro against the US currency.
There was further speculation over defensive inflows into the Swiss franc, especially with evidence of further capital outflows from weaker Euro-zone members and the Euro price action continued to suggest underlying intervention as the National Bank remains under pressure.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was unable to regain the 1.01 level against the US currency on Wednesday and dipped sharply to fresh 2012 lows just above parity against the US unit early in the US session. An attempted rebound on Wall Street helped push the Australian dollar back towards 1.0065. The latest labour-market data was much stronger than expected with a 15,500 increase in employment for April while the unemployment rate dropped to 4.9% from 5.2%.
The positive impact was dampened by a drop in the participation rate and the Chinese trade data also curbed any optimism surrounding the currency as it stalled just above the 1.01 level against the US dollar.
