EUR/USD
A Euro move higher stalled in the 1.2530 area against the dollar on Tuesday and the currency weakened again later in the European session. There was a sharp rise in interest rates at the latest Spanish bill auction while bid/cover ratios were also lower which increased concerns that Spain will find it increasingly difficult to secure market funding, especially if investor support was weakening at shorter maturities.
Underlying sentiment surrounding Spain remained extremely weak amid fears that sovereign and banking-sector debt were becoming increasingly dependent and vulnerable on each other. The EU Commission launched its long-term plan for banking union and greater fiscal union, but markets focussed more on underlying stresses and short-term fears within the Euro area.
The latest US consumer confidence index was weaker than expected with a decline to 7-month lows of 62.0 from 64.4 previously and the latest Richmond Fed index was also lower than expected, but the housing data remained more positive with the Case-Shiller index continuing to register monthly improvements which maintained optimism surrounding US out-performance, at least on a near-term view.
German Chancellor Merkel stated that there would be no total debt Euro-zone liability within her lifetime, maintaining the tough stance on bonds seen ahead of the EU Summit. There were further tensions surrounding Italy with reports that Prime Minister was close to resigning. The Euro weakened to lows below 1.2450 following Merkel’s reported comments before finding some support and rallying back towards 1.25 on short covering. More positively from a Euro perspective, there were some reports that ESM rules could be amended so that Spanish bonds do not have seniority which would ease stresses surrounding the banking bailout. This could provide some degree of relief, although it will do little to alleviate underlying debt concerns and the Euro stalled just above 1.25.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar drifted weaker during the European session on Tuesday before finding support in the 79.25 area and rallying slightly as equity markets came off initial lows
The government secured passage for the bill to double the sales tax rate to 10% over the next three years, but there were further concerns that internal dissent would force the calling of an early general election.
The yen continued to gain some underlying support from underlying fears surrounding the growth outlook as Euro-zone doubts remained a key market focus while there were continuing doubts surrounding the global economy. In this environment, selling pressure on the yen was limited with the dollar consolidating just below 79.50 in Asia on Wednesday.
Sterling
Sterling initially found support below 1.5580 against the dollar and rallied sharply to a peak near 1.5650 with the UK gaining sharply against the Euro as it traded beyond 0.80 for the first time since the beginning of June.
Bank of England members were generally pessimistic on the economic outlook in parliamentary testimony on the latest inflation report. Governor King stated that he was now much more concerned over the situation with unease surrounding the US economy and increased fears surrounding the Euro-zone situation which will inevitably damage the UK outlook.
The MPC members doubted whether a cut in interest rates would be effective, although the measure had not been ruled out. At this stage, further quantitative easing in July remains the most likely outcome.
The government borrowing requirement increased to GBP15.6bn for May from a surplus the previous month and the more telling comparison was a wider deficit compared with last year which will maintain concerns over both the growth outlook and government finances. On domestic grounds, Sterling support is likely to remain very limited, but with Euro-zone defensive considerations still having a key impact.
Swiss franc
The dollar found support on dips to below the 0.96 level against the franc on Tuesday before rallying and pushing to highs in the 0.9650 area, the highest level since early June. There was no change in the Euro as it remained locked in the 1.2010 area.
There was further evidence of capital flows out of the Euro-zone and there will be further expectations of net leakage into the Swiss currency, especially with underlying doubts surrounding other potential defensive currencies.
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Australian dollar
The Australian dollar hit resistance just above the 1.0050 region against the US dollar on Tuesday and dipped to test support close to parity before recovering again in choppy trading conditions. Underlying conditions remained extremely cautious which dampened buying support for the Australian currency.
The domestic influences remained limited with markets cautious surrounding the next Reserve Bank of Australia interest rate decision on Tuesday. The Australian currency was able to consolidate just above the 1.0050 area in Asia on Wednesday.
