Forex Go!

The Euro is trying to make a comeback this morning after its recent disorderly drop on rumors that the ECB is buying Italian bonds. Italian bond spreads have come in sharply – but is the intervention rumor enough here?? After a further steep drop in EURUSD to well below 1.3900 and thus below the 200-day moving average and to below 110 at one point in EURJPY in a disorderly plunge in early European hours, the Euro is trying to stage a steep comeback from huge losses since the levels at which it opened the week. After spiking higher once again, Italian 2-year yields, as of this writing, have come back in around 70 basis points, providing some support to the struggling currency. Some of the support apparently stems from rumors that the ECB is in the market snapping up Italian debt and the situation remains fluid.  The driver punishing the Euro here is simply the fear level generated by the inability of the EU/ECB leadership to come up with a credible solution and the political turmoil surrounding Finance Minister Tremonti and his new budget as well as the uncertainty over what shape a solution to the Greece question will take. As EU finance ministers met yesterday, the news emerging from their talks suggests that we may see a return to the idea of a buying back Greek debt in the secondary market, which would allow it to be retired at a discount and serve as an effective haircut. This will not be enough in the longer run, and the finance minister pledged in an official statement today to come up with more details on a new strategy “shortly”. While we wait for shortly, and perhaps even after shortly comes to pass, nervousness will reign. Odds and ends Watch out for the Chinese economic data out tonight, which will give an indication of the degree to which Chinese efforts to cool inflation are also affecting the broader economy, or at least how much the regime wants us to know about the situation if nothing else. The recent Chinese inflation data point is rather in contrast with the June inflation data elsewhere, which has generally shown signs of cooling in June due to the drop in oil and other prices. The Bank of England must be enormously relieved after the headline UK CPI showed an absolute drop in June and after the core CPI inflation rate slowed to its lowest year-on-year comparison since November of last year. With Brent crude back sharply higher again in through early July, however, the lower CPI argument will be a tough slog for this month. A data point giving no one relief on the pound’s prospects was the trade balance, which showed an ugly dip lower to the weakest level of the year. The US Trade deficit was far worse than expected, topping 50 billion for the month of May and at the worst level since August 2008, the month before the global financial crisis went into full swing. Most of the negative surprise was in the petroleum category, as the ex petroleum deficit rose less than 2 billion for the month, suggesting that no major structural development is behind the number. How long the US can continue to finance trade deficits like this remains an open question. On that note, China’s FX reserves ballooned another $150 billion in June – actually about $35 billion less than expected Looking ahead The USD has made a significant move here – let’s see if another round of extend and pretend (new framework for Greece, new Italian budget meeting approval, etc.,) is enough to knock this move completely back or if we have reached a point where the market is tiring of this game? The interesting thing here is that, regardless of whether the powers that be are able to smooth things over in Europe, we still have a huge open question on our hands – is the global economy heading into a soft patch or worse. If the answer is in the affirmative, this can be another potential source for USD strength here. On that account, corporate earnings and outlooks could provide some guideposts. Chart: NZDUSD The broad based USD strength is finally spreading to crosses like NZDUSD, which had proved resilient to the Euro-generated nervousness until yesterday. The damage done over the last two days of trading here are rather significant. While NZDUSD managed to rally even after initially rejecting the move above 0.8120 back in early June – we now have another and more high momentum rejection of the attempt above 0.8300. Note the support found at the ascending trendline today, a level that comes in just above the 55-day moving average (red line). The structural damage here is more significant than the last time around and a close below initial support here could set the market up for a swoon down to the quickly rising 200-day moving average in the days and weeks ahead. Stay tuned. Fed in Focus through Thursday The big focus for the next couple of days will be on the US Federal Reserve, as later today (1800 GMT), we have the FOMC minutes for the June meeting and then the semi-annual “Humphrey Hawkins” testimony from Bernanke to Congress starting tomorrow and finishing on Thursday (testimony merely repeated on the second day, though the Q&A session will obviously have different questions. The question is how much more we can wring from the minutes now that so much is made available to the public on the day of the meetings now.  As for Bernanke’s testimony to Congress, at the press conference he had very weak explanations for why the economy is looking a bit weaker here (or no explanations, simply stating that the Fed isn’t “exactly sure why” things are weak at the moment) while still expressing. So is it still too early in the game for Bernanke to make hints of the potential and/or shape of QE3? The testimony may be bland, but how might Bernanke respond if he is asked point blank by a congressman what the Fed would do if the unemployment rate shows signs of creeping back toward 10%?  Be careful out there – volatility is likely to remain very high here. Economic Data Highlights

• UK Jun. BRC Sales Like-for-like out at -0.6% YoY vs. -1.4% expected an -2.1% in May
• UK Jun. RICS House Price Balance out at -27.5 vs. -25% expected and -28% in May
• Japan Jun. Domestic CGPI out at -0.1% MoM and +2.5% YoY vs. -0.2%/+2.4% expected, respectively and vs. +2.2% YoY in May
• Australia Jun. NAB Business Confidence out at 0 vs. 6 in May
• Australia Jun. NAB Business Conditions out at 2 vs. 0 in May
• Japan BoJ Target Rate left unchanged at 0.10% as expected
• Sweden Jun. CPI Headline Rate out at -0.2% MoM and +3.1% YoY vs. -0.1%/+3.2% expected, respectively and vs. +3.3% YoY in May
• Sweden Jun. Core CPI out at -0.3% MoM and +1.5% YoY vs. -0.1%/+1.6% expected, respectively and vs. +1.7% YoY in May
• UK May DCLG House Prices fell -1.6% YoY vs. -0.3% in Apr.
• UK May Visible Trade Balance out at -£8476M vs. -£7336M expected and -£7643M in Apr.
• UK Jun. CPI out at -0.1% MoM and +4.2% YoY vs. +0.2%/+4.5% expected, respectively and vs. +4.5% YoY in May
• UK Jun. Core CPI out at +2.8% YoY vs. +3.3% expected and +3.3% in May
• UK Jun. RPI out at 0.0% MoM and +5.0% YoY vs. +0.3%/+5.2% expected, respectively and vs. +5.2% YoY in May
• US Jun. NFIB Small Business Optimism out at 90.8 vs. 91.2 expected and 90.0 in May
• Canada May International Merchandise Trade out at -0.8B as expected and vs. -0.9B in Apr.
• US May Trade Balance out at -$50.2B vs. -$44.1B expected and -$43.6B in Apr.

Upcoming Economic Calendar Highlights (all times GMT)

• US Fed’s FOMC minutes from June meeting (1800)
• US Weekly API Crude Oil and Product Inventories (2030)
• Australia Jul. Westpac Consumer Confidence (0030)
• China Jun. Industrial Production (0200)
• China Q2 GDP (0200)
• China Jun. Retail Sales (0200)
• Japan May Capacity Utilization (0430)
• Japan BoJ Monthly Economic Report (0500)

Similar Posts:

• Japanese Exports Selling the Greenback
• Greek Drama Calms But Italy May Be Next
• USD struggles as QE3 trade supposedly on the loose
• EUR/USD: Correction higher may extend now
• U.S. stock futures advance on Ford earnings