Forex Exchange Morning Report (25/06/2012)

Market wrap

Risk markets firmed moderately on Moody's actions and ECN collateral changes, the S&P500 closing 0.7% higher. Moody's downgrades of 17 major global banks were not quite as bad as feared, helping banks stocks rally. The ECB confirmed a further relaxation of collateral rules, making it easier for Spanish banks in particular to borrow from the central bank. The Spanish 10yr government bond yield fell 23bp, and Portugal's fell 66bp to a May 2011 low (its successful completion of a review also helped). The CRB commodities index closed 0.3% higher (oil +2.0%, copper +0.2%). US 10yr treasury yields rose from 1.61% to 1.68%. During the weekend a Turkish warplane was shot by Syrian forces in international airspace, and a response was being weighed by officials – a negative factor for markets today.

The US dollar index (DXY) was confined to a narrow sideways range on Friday. EUR firmed slightly from an early London 1.2520 to 1.2583 on the ECB news and then remained inside that range. USD/JPY ground higher from 80.30 to 80.57. AUD extended its domestic session decline until the London open, then firming from 1.0009 to 1.0078. It opens this morning at 1.0050. NZD similarly rose from an early London low of 0.7847 to 0.7919, and opened at 0.7905 this morning. AUD/NZD fell from 1.2760 to 1.2715. Short speculative futures positions in EUR, AUD and NZD were pared back last Tuesday, consistent with the bullish price action until then

Economic wrap

Canadian CPI slumped from 3.0% yr to 1.2% yr in May, with the core rate easing 0.3 ppts to 1.8% yr and lower energy prices along with clothing and vegetables explaining most of the rest of the decline.

German IFO business climate index down from 106.9 to 105.3 in June, with expectations down a steep 3.5 pts (wiping out 6 months of gains from October to April in the last two months) but the current assessment recovering 0.7 pts after falling 4.3 pts in May.

Four key EU leaders (Merkel, Hollande, Rajoy and Monti) met in Rome and afterwards claimed'growth and employment must now become focus' (Merkel),'the euro is here to stay' (Monti) and the hardest to swallow'Europe is solid and strong' (also Monti). Meanwhile the ECB relaxed collateral requirements to make it easier for banks to access ECB funding, though this falls well short of the IMF's call for the ECB to resume its sovereign bond purchases.

FX Fundamental Analysis(25/06/2012)

USD

Looks like investors turned their eyes on the dollar on Thursday. USD appreciated versus all its major currency competitors, bolstered by uncertainty about Greece and Spain, especially after Fed decided not to perform direct QE, but only to continue Operation Twist. European economic data indicated further weakening, which was supportive of the dollar too. Messages from Japan and from Britain bolstered the currency, where both regulators expressed their readiness to commence another round of quantitative easing. US economic statistics wasn't rich in positive releases, although it didn't produce any negative impact on the dollar. Turning to today, nothing significant will be coming out of the United State, so market will be mostly focused on the information from other world regions, especially from Europe, where European finance ministers will be holding ECOFIN meeting to discuss urgent economic issues.

EUR

Spanish debt concerns and uncertain situation with the new government in Greece together with fears that the European Central Bank could continue cutting its interest rates pressured the euro, especially on the back of recent FOMC decision not to increase the volumes of quantitative easing, although they had been expected to. As a result, euro slipped over 150 pips versus the dollar at the end of the session. European eco statistics left much to be desired as it came in with negative releases, that indicated further slowdown in business activity (Preliminary composite PMI was unchanged - at 46.0 in June, manufacturing PMI slipped from 45.1 to 44.8, Services PMI improved to 46.8, still being in a downtrend ). German figures came in at 48.5 (composite), 44.7 versus 45.2 earlier (manufacturing PMI) and 50.3 after 51.8 (services PMI), which upset market sentiment even more. Current Account surplus narrowed to 4.6 billion versus the prior +10.3 billion Euros in March. In the spotlight today will be Ifo report, expected to add negative moods towards the euro. Business climate should have slipped from 106.9 to 105.6 in June. Current situation may register 112.0 versus the prior 113.3, expectations will be down to 99.9 after 100.9 in May. Also, market will be looking closely at political events too, especially at the news from ECOFIN meeting.

GBP

Pound was pressured versus the dollar on the overnight session as investors become more and more assured that the Bank of England may commence another round of QE as soon as at the next meeting as more policymakers express the idea of increased emission mentioning, that lower inflation creates good conditions for further monetary easing. On the data front were some positive releases, but they didn't support the pound anyway. Economic statistics came in with increasing retail sales, which registered +1.4% m/m,+2.4% y/y in May, which had been significantly better than expected +0.8% m/m, +1.7% y/y and the previous decline by 2.4% m/m, 1.1% y/y in April. CBI reported industrial production climbed from -3 in May to +7 in June, orders improved from -17 to -11, exports rose from -12 to -4. Today nothing significant will be published in the UK, so investors will stay under the influence of external data.

JPY

USD/JPY pair continued its growth on lack of rhetoric from the US regulator to commence one more round of quantitative easing. Also, dollar was bolstered versus the yen following comments from the Bank of Japan - the regulator considered current 70 trillion yen asset purchase volume not enough and called for its widening. As a result the yen found itself at the new local minimums versus the dollar. Nothing significant came out of Japan's economy today except for supermarket sales, which registered some growth in May - -1.7% y/y after -1.9% y/y in April. As for the yen's outlook, it's decline looks to be more likely, although technical factors suggest to expect a stop taking into account strong resistance level on the way.