EUR/USD
The Euro was confined to narrow ranges during Monday with consolidation the underlying theme following sharp losses last week. There was support above 1.2550 against the dollar, but it failed to make much impression on resistance levels. There were further concerns surrounding the Spanish outlook as benchmark bond yields again moved above the 7.0% level before drifting lower later in the day.
The EU Commission was again hopeful that ESM funding for Spanish banks would be available without the necessity for a sovereign guarantee and the Eurogroup signed a political understanding with EUR30bn made available immediately to underpin the banks. There was also a pledge that Spain would be given an extra year to 2014 to cut the budget deficit to the 3.0% of GDP level from 6.3% this year. There were, however, still major uncertainties over the policy details and the EU admitted that no ESM stakes could be taken before a Euro-zone banking Supervisor was in place.
There was still evidence of strong demand for defensive assets with another negative interest rate in the latest German government bill auction while Dutch rates were also close to zero which suggests that there are still very serious investor concerns surrounding the Euro structural risk.
The ECB confirmed that no secondary bond-market purchases had been made in the latest reporting week and bank president Draghi broadly repeated his latest press conference comments in testimony to the European parliament. The Sentix index of business confidence declined to a three-year low according to the latest survey.
Regional Fed President Williams maintained his dovish tone in a speech on Monday, reinforcing the tone seen by Evans over the weekend. There will be further speculation that the Federal Reserve will move to additional quantitative easing which is likely to be important in curbing dollar demand. Global growth doubts are still likely to be important in curbing selling pressure on the US currency and the Euro hit resistance above 1.23.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support on dips towards 79.50 against the yen on Monday, but was trapped within very narrow ranges as the Euro found some support below the 98 level.
Global growth concerns were important in curbing any yen selling pressure on the Japanese currency, but there was still a reluctance to buy the currency, especially with speculation that the Bank of Japan could move to take additional policy measures later this week. The domestic influences remained limited with a slight decline in consumer confidence and the dollar was held in tight ranges during the Asian session with dollar support below the 79.50 level.
Sterling
Sterling found support on dips towards the 1.5460 area against the dollar on Monday and edged back to the 1.5520 area later in the New York session as the Euro was unable to sustain any significant move higher and hit resistance close to 0.7950. There were no major developments surrounding Bank of England deputy Governor’s testimony on Libor to the Treasury Select Committee and the market reaction was limited.
There were further very important concerns surrounding the UK economic outlook, especially as weak output will make it extremely difficult to cut the budget deficit. The latest RICS house-price index dipped to an 8-month lows of -22% from -16% while there was a limited gain in retail sales.
Defensive considerations were still important and the UK AAA credit rating is still having a significant impact in boosting short-term Sterling demand. There was also speculation over merger-related flows into Sterling which had a positive impact.
Swiss franc
The dollar was blocked in the 0.98 region against the franc on Monday and drifted back to the 0.9750 region with a lack of fresh incentives as the Euro remained trapped near 1.2010. There was no evidence at this stage that underlying Euro selling had eased.
If the National Bank is being forced to intervene heavily to protect the 1.20 minimum Euro level, there will be further speculation that the minimum level could be broken. Very heavy Euro losses against the dollar would increase pressure for the Euro minimum policy to be abandoned.
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Australian dollar
Although the Australian dollar was generally weak in European trading on Monday, the currency did find support on dips towards the 1.0150 area and moved back towards the 1.02 area. Continuing concerns surrounding the global growth outlook was countered by speculation that central banks could diversify reserves into the Australian currency.
The Australian dollar weakened following the larger than expected Chinese trade surplus with disappointment over the level of exports and imports which increased unease over demand for Australian exports.
