A slightly more slightly optimistic tone, after yesterday when the European bank stress tests were deemed flawed (not even mentioning a sovereign default) and triggered a risk off environment. However, is a growing sense of trepidation around Thursday`s EU summit which has manifested itself in choppy, quick to find safe-havens trading. Traders are nervously watching the aggressive sell-off in Spanish and Italian sovereign yields. There is a feeling that the event horizon for these larger European economies is not too far off (especially with Italy having to go to the capital markets heavily in the remainder of the year). However, in anticipation of positive events potentially emerging from the Summit, short-term traders have been unwinding short EURUSD positions. The pair has been able to rally to 1.4150 in early European session while EURCHF has climbed nearly 80 pips to 1.1622. The move seems to be more of a correction than a rally, as yesterday`s German government spokesman stated that “Germany seeks to send a clear signal to the markets from Thursday summit”, failed to acquire much attention when released. EU peripheral CD prices have come in a bit, suggesting positioning ahead of the Summit and European & US stock indices have turned positive. However, even if we get some type of resolution, the high probability trade will be it not be comprehensive and while structural issues remain, we would fade any upswing in the EUR. We are also concerned that EU policies makers will once again fail to provide the markets with serious reassurances that a bailout is in the works.
In Australia, minutes of the July 5th meeting confirm that the RBA has swung resolutely to a neutral policy bias. The policy minutes stated that “the flow of recent information suggested both that there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time”. This means that the inflation report on the 27th of July will be critical in determining the short term policy path. While we have trimmed back our expectations alongside the market, we do believe that the current interest differential will provide adequate incentive for traders to buy AUD and keep the AUDUSD supported.
On the US side of the trade, Moody’s and S&P put the US AAA rating on negative credit watch last week, which was a “shot over the bow” for investors, signaling that the USA is also struggling with its own fiscal problems. The debt ceiling has been weighing on investors sentiment, as the University of Michigan consumer sentiment dropped to 63.8 vs. 72.2 exp on Friday. We are anticipating that congress will agree to raise the debt ceiling $2.4trn this week, which should in the short term, perceived as USD positive. However, it’s only a matter before the US must address their own fiscal demons.
German ZEW sentiment data, US housing starts and building permits and Canadian rate decisions are today’s important economic data due. The BoC is widely expected to keep base rates unchanged at 1.00% today and we expect to see a marginally hawkish statement given, which may be higher than expected for the CPI read (CAD should benefit). While focus will remain primarily on bond auctions (Spanish and watch for the yield and not bid-to-cover ratio) and EU policy makers summit this week.
09:00 EUR ZEW Survey (Econ. Sentiment) (Jul) index
09:00 EUR GE ZEW Survey (Current Situation) (Jul) index
09:00 EUR GE ZEW Survey (Econ. Sentiment) (Jul) index
12:30 CAD Leading Indicators (Jun)
12:30 USD Housing Starts (Jun) lvl 575K exp
12:30 USD Building Permits (Jun) lvl 597K exp
13:00 CAD Bank of Canada Rate % 1.00% exp/prior
The Risk Today: EurUsd With only two days away from the EU summit there is a natural short unwind occurring in the market giving the pair a intraday bullish tone. However, we are undecidedly bearish on the pair. EURUSD impressive momentum vanished Thursday and short term indicators have reverse. Initial resistance stands at 1.4200 (15th July high), 1.4282 (14th July reaction high). We view first support to be located at 1.3950 (13th July low), then 13837 (13th July low) which break would open up a move to 1.3732 (bullish trend floor).
GbpUsd The cable failed to break the 1.6221/55 (bearish trend ceiling & 21st June high) last week, so 3-month bearish trend remains intact. That said, momentum indicators showing significant divergence indicating this bullish move could have further to go. Resistance stands at 1.6194 (14th July high), 1.6221, than plenty of room till 1.6442 (14th June high). We should see buyers stepping in around 1.6067 (8th July high) then not much noise till 1.5949 (12th July high).
UsdJpy Not much doing here. Last weeks aggressive selling has pushed the pair below the 79.70 range support a slowed down. Falling yields in the US continues to put buying pressure on the JPY but have stabilized. We would be looking to sell rallies below 80.50, as the support is located at 78.45 (14th July low) then all time lows at 76.25 (17th March low). After that, the situation become difficult and we should have further saber rattling from Japanese policy makers. Resistance is located at 79.15 (Intraday reaction spike high), 80.38 (12th July high) 81.48 (8th July high)
UsdChf We are seeing some unwinding of short position ahead of Thursday but not much more. With traders seeking safe-havens, CHF is still in the driving seat. Below 0.8550 (16th June high & bear downtrend ceiling) we remain bearish on the USDCHF and look for opportunity to sell on rallies. Initial support is now located at 0.8152 (intraday low), then 0.8033 (all-time low). After that…??? Minor resistance is located at 0.8233 (Intraday High), then 0.8331 (13th July high), 0.8521 (8th July high), stronger 0.8551/53 (15th & 16th June high) and 0.8680 (long term bearish downtrend ceiling).
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- USD Suffers as Politicians Fight
- Moody Announcement Puts the Focus Back on the US
- Finally, a day packed with events and economic data!
