EU Banking Bailout Inspires 5% Stock Rally

U.S. Dollar Trading (USD) the USD was under pressure the whole of Friday from the EU announcement in Asia that the ESM Bailout money will be directly able to support European banks. Also any of this fresh money lent to banks will not rank above other investors. On Top of this very positive move for European banks the ESM funds will also be able to invest directly in government debt markets. This could have the effect of lowering the Yields on Spanish and Italian Debt which has been a major global market issue. Looking ahead, June ISM Manufacturing forecast at 52 vs. 53.5 previously.

The Euro (EUR) the EUR/USD rallied from 1.2400 to 1.2700 in the biggest rally of the year so far as the market was shocked by the EU Summit agreements and the backing down of German opposition of using the ESM to bailout Spanish bonds and banks. The effect of the bailout could last longer than the attempts to stem the crisis but as always the devil will be in the detail as the market digests just exactly who will pay and how much. The Sterling (GBP) Cable moved to 1.5700 in line with the stock market moves but lagged behind the EUR/USD with the EUR/GBP recovering some of its recent losses. EUR/GBP moved from below 0.8000 to 0.8080 and could move even higher as the Bank of England is expected to expand their Asset Purchase program when they meet Thursday. Also ahead, June EU Manufacturing PMI forecast at 44.8. Also UK Manufacturing PMI forecast at 46.5 vs. 45.9 previously. Also released, May EU Unemployment Rate forecast at 11.1% vs. 11.0% previously.

The Japanese Yen (JPY) the USD/JPY had any interesting day initially unmoved by the EU announcement but then as EUR/JPY gains accelerated the major was lifted up near Y80 before resistance was found at the key level. The EUR/JPY moved 3 Yen higher from Y98.50 to Y101.40 before coming under consolidation. A big week of US data will keep the USD/JPY in play with the highlight Friday’s NonFarm Employment Report. Australian Dollar (AUD) the Aussie is a risk currency and so rallied dramatically on Friday up from parity to key resistance at 1.0240. The outlook is mixed with the recent interest rate cuts and Chinese slowdown leading many analyst to suggest a lower AUD but the stock market is the key driver so it will be watch for direction. A continued rally would see the medium term bull target of 1.0500 open up. UPDATE Q2 Japanese Tankan improves to -1 vs. -4 forecast and previously.

Oil & Gold (XAU) Gold was dramatic as always rallying to $1600 as the USD was sold across the board. The tempering of EU Debt fears may reduce demand going forward though for the precious metal. OIL/USD was strong surging $5 a barrel as the global outlook improved.

Forex Exchange Morning Report (2/07/2012)

Market wrap

Risk markets rallied sharply on Friday following a new pact announced at the EU summit. Markets were not expecting any significant progress but received three important initiatives were announced: the ESM bailout fund can support European banks directly (instead of via their governments), EFSF lending to Spanish banks won't rank above investors (the EFSF merges into the ESM in July), and the ESM can intervene in government debt markets (restraining the rise in yields in Spain and Italy, in particular). A key element behind these initiatives was the softening of Germany's earlier opposition, leading some to expect further progress towards communal European debt issuance. Outside Europe, China's official manufacturing PMI beat estimates. European stocks closed 5% higher and the S&P500 closed up 2.5%. Commodities surged, the CRB index up 4.6%, oil +9.4%, copper +4.9%, and gold +2.9%. US 10yr treasury yields extended from 1.62% to 1.68% in London. Spain's 10yr yield fell 61bp to 6.33%, Italy -38bp to 5.82%.

The US dollar index (DXY) fell 0.8% further during the London morning and then consolidated. EUR rose from 1.2560 to 1.2693, and consolidated in NY. It opened this morning at around 1.2670. USD/JPY rose from 79.40 to 80.00. AUD extended Friday's domestic rally further from 1.0160 to 1.0259, and opened this morning at 1.0240. NZD similarly extended from 0.7950 to 0.8042, opening this morning at 0.8004. AUD/NZD rose with risk sentiment from 1.2740 to 1.2805

Economic wrap

US core PCE deflator 0.1% in May, for the second month running, pulling the core annual pace down to 1.8% yr, after temporarily peaking at 2.0% yr in Mar. Meanwhile personal income growth remained sluggish at 0.2% and personal spending stalled in May after growing just 0.1% in March and April - the weakest three monthly growth pace since 2009.

US Chicago PMI little changed at 52.9 in June from 52.7 in May, the two weakest readings since the recessionary year of 2009. The Milwaukee PMI however roe from 57.7 to 60.2 in June. US Uni of Michigan consumer sentiment revised down from 74.1 to 73.2 in June, with both present and future components weaker. It was already the weakest reading for the year so far.

Canadian GDP growth accelerated to 0.3% in April, the fastest so far this year after stagnating monthly activity through Q1. Also industrial product prices were flat for the second month running in May.

Euroland CPI steady at 2.4% yr in June flash estimate, holding at its lowest since early 2011. Meanwhile M3 money supply growth accelerated from 2.5% yr to 2.9% yr but private sector loan growth slowed to just –0.1% yr with loans falling every month since Feb, more evidence the economy is going backwards. German retail sales fell –0.3% in May and April's gain was revised to a –0.2% fall but March was revised from a 1.6% to 2.2% gain. Weather may be a factor at play here.

BoE Governor King said the deteriorating outlook for financial stability is constraining the economy and delaying recovery and banks should build bigger capital cushions and have ready access to liquidity (launching the twice yearly financial stability report). “Uncertainty and tighter credit conditions have acted as strong headwinds to our recovery... [we] believe that there is a need for banks temporarily to raise their levels of capital in view of the exceptional threats they currently face.” Meanwhile UK GfK consumer confidence was unchanged at –29 in June.

Market on 02/07/2012

Dollar is expected to be open down today

EUR and GBP are expected to be open UP or Flat

JPY will open down today.