EUR/USD
The Euro dipped to test support below the 1.26 level against the dollar on Friday before rallying into the New York close. There was further evidence of short covering ahead of the weekend, especially with major uncertainty surrounding the Greek election on Sunday. There was further speculation that global central banks would provide liquidity to help stabilise conditions which helped underpin the Euro.
Spanish and Italian bond yields stabilised at elevated levels with underlying fears over the economic outlook still very high. There were further comments from ECB officials suggesting that there were no major difficulties surrounding the deposit rate being at zero which maintained the potential for the central bank to cut interest rates.
The US data releases maintained a generally weaker tone with the New York manufacturing index declining to 2.3 for June from 17.1 previously, maintaining fears over an important deterioration in the manufacturing sector. The latest University of Michigan consumer confidence index was also weaker than expected at 74.1 from 79.3 previously which will ensure further speculation over a generally dovish Fed tone at Wednesday’s FOMC meeting.
The latest IMM data recorded a decline in US dollar positions, but there was still a very substantial long position which will maintain the potential for short Euro covering which will continue to hamper the US currency.
In the Greek general election, there was a narrow win for the New Democracy party with a provisional 129 of the 300 seats and any coalition with Pasok would hold a small majority in parliament. Syriza’s failure to win the election will dampen fears surrounding an immediate confrontation with the EU and IMF over the bailout terms, but underlying uncertainty will persist given the very high degree of opposition to austerity.
The Euro opened sharply higher in Asia on Monday and reached a 1-month peak close to 1.2750 before easing again. The currency will gain immediate support from relief over Greece, but confidence will weaken sharply again if there are difficulties in forming a coalition and underlying sentiment is still very fragile.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to regain the 79 level against the yen during the European session on Friday and retreated sharply to lows below the 78.60 level with stop-loss selling a notable feature.
The yen maintained a solid tone in the New York session even though there was a general improvement in global risk appetite.
The Japanese currency lost ground following the Greek election result as risk appetite strengthened and the US currency pushed to high close to the 79.30 area as Asian equity markets rallied. There were still doubts whether there will be sustained relief surrounding the global outlook and sustained flows out of the yen.
Sterling
Sterling dipped to below 1.55 against the dollar on Friday, undermined initially by a wider than expected trade deficit as the shortfall increased to a 7-year high of GBP10.1bn which increased concerns over the growth outlook as exports were generally weak.
Markets were able to take a generally positive attitude towards the proposals to boost bank lending, especially as there was a rally in UK bank share prices. There were still expectations that the Bank of England would move towards additional quantitative easing, potentially as early as the July policy meeting.
There was a decline in UK bond yields during the session and the spread over German bunds narrowed to a three-month low. Nevertheless, Sterling rallied strongly from lows and pushed to a high above 1.57 against the dollar as stop-loss UK buying was also a feature.
In this context, there were strong expectations that the UK was benefitting from defensive inflows with speculation that the Swiss National Bank was diversifying reserves into the UK currency. Euro relief curbed flows into Sterling on Monday and the UK currency was unable to make further headway.
Swiss franc
The dollar was unable to make any headway against the franc on Friday and retreated to lows below 0.95 before finding some degree of support while the Euro was trapped close to the 1.2010 level, unable to secure any significant support.
There was further speculation both over defensive inflows into the Swiss currency and more aggressive National Bank action to block any gains. The Greek election result may provide some respite for capital flows into Swiss assets, although there will still be a high degree of underlying uncertainty surrounding the situation and relief may prove transitory.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was able to resist any renewed test of support below parity against the US dollar on Friday with a move towards the 1.0080 area. The Australian currency drew support from the underlying weaker US tone and from expectations that global central banks would be able to counter any systemic vulnerability following the Greek election and act to underpin the banking sector.
There was relief surrounding the Greek election result and the Australian currency drew support from an improvement in risk appetite with highs around 1.0130 before momentum slowed.
