EUR/USD
The Euro found support on dips towards 1.25 against the dollar on Wednesday and maintained a generally firmer tone with a covering of short positions offsetting underlying fears. Spanish and Italian yields edged higher during the day which undermined confidence as 12-month Italian bill rates also rose sharply to 4.0%. German bond yields also rose which increased speculation over wider capital outflows from the Euro area.
There were further uncertainties surrounding the Greek election with a flurry of comments from political leaders. New Democracy Leader Samaras suggested that the EU would be prepared to be more flexible on austerity demands while Syriza leader suggested that Greece would not be expelled from the Euro area. There were contrasting media reports from other countries with UK Chancellor Osborne suggesting that Greece could be sacrificed in order to allow domestic political backing for greater support for other countries while elsewhere was still some optimism that the EU would relax austerity.
Spanish Prime Minister Rajoy also called for a battle to be waged to solve liquidity and funding pressures with the government sounding increasingly desperate. There were some suggestions that one Spanish bank should be liquidated rather than recapitalised. The latest Euro-zone industrial production data was close to expectations with a 0.8% April decline.
The US retail sales data was weaker than expected with a 0.2% headline decline for May, matching April’s revised fall. There was also a weaker 0.4% decline in core sales after a 0.3% fall previously. The headline producer prices data was also weaker than expected with a 1.0% monthly decline as core prices were in line with expectations with a 0.2% rise.
The data will dampen sentiment towards the US outlook to some extent and there will also be additional pressure on the Federal Reserve to provide additional quantitative easing. It will certainly give the Fed greater flexibility if it decides that further action is required.
There was a further round of Euro short covering during the New York session with increasing uncertainty the main market feature as liquidity dissipated. After a peak close to 1.26, there was renewed selling as Moody’s cut Spain’s sovereign rating by three notches to BAA3 and warned over further potential action with little change during the Asian session on Thursday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar pushed to a high just above the 79.70 area early in US trading on Wednesday before surrendering the advance later in the session.
There was disappointment surrounding the latest US economic data releases which pushed the currency lower with a test of support near 79.30 and it failed to regain ground.
Both currencies tended to lose defensive support as the Euro rallied and bond yields increased. There was caution over aggressive yen buying given speculation over additional Bank of Japan policy action at Friday’s meeting which provided important dollar protection. There was a downward revision to Japan’s industrial production data for May which will create some pressure on the central bank.
Sterling
Sterling pushed to a high close to 1.56 against the dollar on Wednesday while it under-performed against the Euro with a move back towards the 0.8080 area. There was a rise in German bond yields which suggested defensive flows into Sterling may also have lessened.
Underlying confidence in the UK economy is likely to remain very fragile with markets still on high alert over the potential for additional quantitative easing. There was also increased speculation that the Bank of England would look for alternative ways to cut borrowing costs and boost lending to help underpin the economy and this was significant in pushing Sterling to lows near 1.55 against the dollar later on Wednesday.
The comments from Bank of England Governor King in the key Mansion House Speech on Thursday will be watched very closely, especially with wider Euro-zone uncertainty.
Swiss franc
The dollar was unable to regain the 0.96 area against the franc on Wednesday and dipped to lows below 0.9520 during the New York session. Despite a rally against the dollar, the Euro remained under pressure and trapped below 1.2010 against the Swiss currency which suggested further pressure on the Euro minimum level.
The quarterly National Bank policy meeting will be a key focus during Thursday. The timing, just three days ahead of the Greek election suggests that further immediate policy moves are unlikely, but the bank could hint at potential action if stresses intensify further over the next few weeks.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar found support on dips towards 0.9950 against the US dollar on Wednesday and pushed to highs near parity where resistance levels proved difficult to break down.
There were reports that the German Bundesbank was considering placing additional reserves into the Australian dollar which triggered a move higher in the currency. There was also some benefit from an improvement in risk appetite.
Renewed selling pressure on equities following the Spanish rating cut triggered an Australian dollar retreat to the 0.9920 area before a tentative recovery.
