EUR/USD
The Euro again stalled in the 1.28 region against the dollar in European trading on Tuesday and initially dipped to lows in the 1.2730 area during the US session. In the latest Spanish Treasury Bill auction, there was a rise in yields and lower bid/cover ratios compared with the previous sale. Although a relatively small auction, the outcome increased unease surrounding the Spanish economy and potential loss of investor confidence.
Greek political party Syriza stated that it would be able to combine continued Euro membership with abandonment of the austerity programme, but this will be seen as posturing and markets have very little confidence in this outcome.
French officials continued to promote the introduction of Eurobonds ahead of Wednesday’s informal EU Summit in Brussels while Germany continued to insist their opposition to joint bonds. Both France and Germany looked to play down the importance of the Summit insisting that it was only a staging post towards the June meeting, but tensions will still be high.
The US existing home sales data was in line with market expectations at 4.62mn for May which was the highest since the third quarter of 2010. In contrast, the Richmond Fed index dipped to 4 from 14. Although there are persistent doubts surrounding the US outlook, there is still confidence that it will out-perform the Euro-zone which helped underpin the dollar.
Emerging-market currencies also remained generally vulnerable as the Indian Rupee dipped to fresh record lows and this also provided important net US currency support on capital flows and defensive demands. The Euro was subjected to renewed pressure after former Greek Prime Minister Papademos warned that a Greek Euro exit was a real risk. The Euro dipped to lows just below 1.2650 as the key 1.2625 support area came into focus again.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was able to push above the 79.50 area against the yen on Tuesday which helped boost underlying sentiment and the US currency gained additional momentum during the European session.
Ratings Agency Fitch downgraded Japan’s sovereign rating by two notches to A+ from AA which undermined the yen, especially with the agency highlighting a lack of economic reform.
The Bank of Japan held monetary policy unchanged at the latest policy meeting. This was the expected outcome, although there was some speculation that there could have been further action. There was further political pressure for action and the decision not to expand policy curbed yen selling. Although the trade account remained in deficit for April, there was a 7.9% annual increase in exports which provided some relief and the yen strengthened back towards 79.50 as risk appetite remained very fragile.
Sterling
The headline UK inflation rate fell to 3.0% for April from 3.5% previously which was the lowest reading for three years. Significantly, with a figure of 3.0%, the Bank of England did not have to write an explanatory letter to the Chancellor which will have come as some relief to Bank of England Governor King.
The latest government borrowing data recorded a sharp improvement for April with a net repayment of GBP18.8bn. The outcome was distorted y a one-time receipt in relation to the Royal Mail pension fund and there was a net underlying deterioration.
The IMF called for a further relaxation of monetary policy and also stated that a scaling back of fiscal tightening would be required if the economy deteriorated further.
Given the IMF warnings and the inflation decline, there was increased speculation that the Bank of England would introduce fresh quantitative easing. Wednesday’s Bank of England minutes will be watched closely on for further evidence on likely near-term policy.
Sterling retreated to lows around 1.5740 against the dollar while making some headway against the Euro with a move back to below 0.8050.
Swiss franc
The dollar found support below 0.94 against the franc on Tuesday and moved back towards the 0.9490 area later in the US session as the Euro remained virtually paralysed against the Swiss currency.
There will be major doubts whether Euro-zone leaders can stem the contagion effect and curb capital outflows from the Euro-zone which will maintain the risk of upward pressure on the franc. With Fitch downgrading Japan’s credit rating, there will also be speculation of increased defensive demand for the Swiss franc which would increase pressure on the National Bank.
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Australian dollar
The Australian dollar continued to take advantage of improved risk appetite and pushed to highs around the 0.9930 area against the US dollar in Europe on Tuesday.
The currency was unable to sustain the advance and retreated back towards the 0.9850 area in New York. There were further concerns surrounding the outlook for commodity prices and doubts over the global growth profile which had a significant impact in curbing Australian dollar demand.
Selling pressure intensified late in New York as risk appetite deteriorated again and the currency retreated to a fresh six-month low just below the 0.9750 area as Asian fears increased further.
