EUR/USD
The Euro probed technical levels during the European session on Tuesday without being able to make any major directional trend. There was significant resistance around the 1.2520 region as underlying sentiment surrounding the Euro-zone remained extremely fragile as risk events continued to dominate.
There were continuing fears surrounding Spanish debt following the rapid reversal and rise in yields on Monday. Benchmark 10-year yields increased to challenge post-EMU highs above 6.80% with sovereign-debt fears intensifying following the proposed bank support package and there were further ratings downgrades to the banks.
There was also further selling pressure on Italian bonds as markets feared that Italy would slide towards needing a bailout package as well. There was significant friction between Italy and Austria following Austrian Finance Minister Fekter’s remarks that Italy could require assistance. Although Fekter looked to tone down the rhetoric after the Italian government criticised the comments underlying tensions remained high. Wider tensions were also important amid uncertainties over where the Spanish funds would come from and what conditions would be imposed.
Greek political debate also remained an important focus with elections due on Sunday and there were further concerns that softer conditions for Spain would play into the hands of Syriza as they pledged to re-negotiate Greece’s loan terms. There was some Euro support from additional speculation that the Euro-zone would move towards a banking-sector union.
The latest US monthly budget deficit was broadly in line with expectations at US$124.7bn while consumer confidence edged lower according to the latest IBD survey. US developments were of secondary importance, although underlying speculation that the Fed could move towards an easing of policy did curtail dollar buying support to some extent. The Euro retreated to test support around 1.2450 before recovering to the 1.25 region with little change in Asia on Wednesday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was blocked in the 79.70 area against the yen on Tuesday and retreated to lows below 79.50, although ranges were again narrow as cross-market moves dominated with the Euro finding support below the 99 level.
There was underlying yen demand emanating from underlying Euro-zone fears. There was caution over pushing the yen aggressively stronger, especially with unease over the threat of intervention and the possibility that the Bank of Japan would announce further quantitative easing at this week’s policy meeting.
The latest Japanese data was stronger than expected with a 5.7% increase in machinery orders after a 2.8% decline previously which triggered some optimism surrounding investment trends, although the net impact was broadly limited.
Sterling
Sterling hit resistance above 1.5580 against the dollar on Tuesday, but was generally resilient and found support on dips towards 1.55. Moves against the Euro were important as the UK currency advanced strongly to highs near 0.8010 with reports of heavy Euro selling by a UK clearing bank.
The UK economic data remained uninspiring at best with a 0.7% decline in manufacturing production for April as industrial output was unchanged. The NIESR estimated that GDP expanded 0.1% in the three months to May from a revised 0.1% decline for April which did little to inspire confidence surrounding the second-quarter GDP outlook and there was further speculation that the Bank of England would have to resort to additional policy measures.
There was further evidence of defensive demand as an alternative to the Euro-zone even though there were still important fears that the UK economy would be severely damaged if the Euro-zone stresses continued to increase.
Swiss franc
The Swiss government was slightly more optimistic surrounding the 2012 growth outlook in its latest report and also expressed backing for the National Bank’s currency policies. The Euro was unable to make any headway against the Swiss currency and tested levels close to 1.2005 before recovering slightly while the dollar hit resistance close to 0.9650 as trading ranges narrowed over the day.
The underlying trading pattern continued to suggest that the central bank was having to intervene aggressively to prevent franc gains and there were report of margins being tightened on Swiss franc contracts which also unsettled markets.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar found support below 0.99 against the US dollar and tested resistance in the 0.9970 area as the currency proved broadly resilient even when risk appetite deteriorated.
There was further market discussion surrounding the Chinese economic outlook with some optimism following the recent trade data. Ratings agency Moody’s stated that Australia’s AAA credit rating was stable which should provide some degree of Australian dollar support, especially given doubts surrounding all the major AAA-rated economies. Reserve Bank Governor Stevens also stated caution over wishing for a weaker Australian dollar, but the currency was unable to make further headway in Asia on Wednesday.
