EUR/USD
The Euro remained under modest selling pressure during the European session on Friday with lows in the 1.2440 region against the US dollar. The Italian industrial output data was sharply weaker than expected with a 1.9% monthly decline which maintained fears over the economic outlook both in Italy and throughout the Euro-zone.
There was persistent speculation that Spain was on the point of requesting support for the banking sector with a succession of rumours that talks would be held during the weekend. The Spanish government denied the speculation and also stated that no move would be possible until an audit of the banking sector had been completed.
The US trade deficit narrowed to US$50.1bn for April from a revised US$52.6bn the previous month as exports secured modest gains, although the overall market impact was limited. With the Euro able to hold support below 1.2450, there was evidence of short covering during the US session and the currency pushed to a high just above 1.25.
Following talks on Saturday, the EU confirmed that up to EUR100bn would be made available to support the Spanish banking sector. The precise amount of funds available will not be known until the Spanish audit is concluded. There was also uncertainty over whether funds would be made available through the EFSF or the ESM with Finland demanding collateral if it is the former.
There will be significant relief that immediate uncertainty has been eased with Spanish support as it buys time for the Spanish economy. With funding through the FROB, the funds will add to Spanish government debt by around 10% of GDP which will further undermine confidence in the Spanish outlook, especially with recession persisting. There will be further pressure for more aggressive monetary policies with Nowotny suggesting that further ECB interest rate cut could be considered.
The latest IMM positioning data again registered a record Euro short position which will maintain pressure for a covering of short positions. The Euro rose sharply in Asia on Monday with a peak in the 1.2670 area before stabilising near 1.2640 with little follow-through buying.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support on dips towards the 79 level against the yen on Friday and generally advanced over the day, although it failed to sustain a move above 79.50.
The latest Chinese trade data was stronger than expected which provided some underlying relief surrounding the Asian economy and also underpinned risk appetite. The latest industrial and retail data was also better than feared, although it still suggested a further underlying slowdown.
There will still be a high degree of uncertainty surrounding the Euro-zone and global outlook which should curb any underlying selling pressure on the yen. The dollar hit resistance in the 79.80 area in Asia on Monday as the yen lost ground on the crosses.
Sterling
Sterling remained generally on the defensive in Europe on Friday and dipped to test support close to 1.54 against the US currency.
UK input producer prices fell 2.5% for May following a 1.4% decline the previous month as energy prices declined and this will increase speculation that the Bank of England will have greater scope for easing monetary policy if there are further concerns surrounding the economic outlook.
Defensive considerations will remain extremely important in the short term and relief surrounding the Spanish banking-sector support could lessen immediate Sterling demand. There will also be some unease that the UK banking sector will be more isolated outside the Euro area which will lessen UK currency support.
There was a recovery in risk appetite during the New York session and a general retreat in the US currency which provided Sterling relief. A Euro jump higher pushed Sterling to highs near 1.5580 against the dollar in Asian trading on Monday.
Swiss franc
The dollar pushed to highs just above 0.9650 against the franc on Friday before retreating to the 0.96 area in New York. There will be some immediate easing of fear surrounding the Euro area following the Spanish banking-sector support package which could lessen franc demand and the Euro was able to make a slight advance in Asia on Monday as the dollar gapped lower to 0.95.
The underlying evidence still suggest a high degree of demand for Swiss assets which will maintain upward pressure on the currency and keep National Bank intervention firmly in focus with the latest quarterly policy meeting due this Thursday.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar found remained under pressure during the European session on Friday and retreated to lows near 0.9820 before regaining some ground as risk appetite improved and there was a reduction in demand for defensive assets with a move towards the 0.99 area as markets anticipated European support measures.
The latest Chinese economic data, allied with the Spanish banking-sector package helped underpin risk conditions and the currency advanced strongly at the Asian open on Monday with a challenge on parity against the US currency.
