European Credit Concerns Go Global

July 11 2011 by Spencer McKay in Forex Release |No Comments

The lack of urgency after yesterday’s meeting of Eurozone finance ministers in the face of mounting concern over Spain and Italy was the trigger for a global sell off of risky assets. EU yields were under pressure with Spanish 10yr rising above 6.00% for the first time since the inception of the EUR while Italian 10yr jumped 45bp on the day. EURUSD continued in free fall hitting 1.3837 today while EURCHF collapsed to 1.1596 making short work of any support lvls as investors rushed across the border.

Unlike prior European-inspired risk aversion (which involved Greece, Ireland and Portugal) the crisis has now taken on a global risk event and investors are crowding into USD, JPY and Gold (although today the precious metal has come off slightly) and to a lesser extent CHF. USDJPY got hit in early European trading falling to 79.17. Trading is getting vicious and we hope that European policymakers finally recognize the gravitas of the situation. Comments like “we will wait till autumn” are exactly what the market doesn’t want to hear and allowed the contagion to spread. The focus right now will be on the solution to the private sector involvement in the bailouts and the EU bank stress tests (expected to be published on Friday).

Other than those issues, everything else will take a back seat – including worries in the USA. It’s now clear to the market that fiscal consolidation and fragile growth will be enough to put Greece back on the path of stabilization. Eventually the debt overhand will need to be addressed, which most probability means EU steps up or debt restructuring. While the red stock tiles on CNBC emphasizes current market concerns, we don’t see the problems in Italy as extreme as represented. Should EU policymakers in the next few days get a grip on Greece, we suspect that pressure will in the short term ease on Italy and allow a short term risk rally. But given the current stress in the markets, baring an aggressive proactive European response – the downside for Euro and risk correlated trades looks deep.

As for today, the light economic calendar (FOMC minutes tonight) will keep the market’s total attention on event in Europe and given the magnitude of contagion, please trade carefully.

08:30 SEK CPI Headline
08:30 EUR Almunia speaking before EU Parliament Economic committee
09:30 GBP CPI Prior 0.2 M/M 4.5 Y/Y Exp 0.3 M/M 4.5 Y/Y
09:30 GBP RPI Prior 0.3 M/M 5.2 Y/Y Exp 0.3 M/M 5.3 Y/Y
09:30 GBP RPIX Prior 0.3 M/M 5.2 Y/Y Exp 0.3 M/M 5.3 Y/Y
09:30 GBP Visible trade Prior -7.4 Bio Exp -7.3 Bio
13:30 USD Trade Balance Prior -43.7 Bio Exp -43.5 Bio
19:00 USD Minutes of 21-22 FOMC Meeting published

The Risk Today: EurUsd Contagion fears have now entrenched themselves in EURUSD triggering a aggressive sell off yesterday. The collapse of 1.3970 (23rd May low and range floor) now points to a test of 1.3752 (11th May low) then critical 1.3670 (bearish trend floor & 38.2% Fibo lvl). With momentum indicators breaking lower we suspect bullish moves will be capped. Initial resistance stands at 1.4062 (intraday high), 1.4298 (11th July high) then 1.4375 (7th July high).

GbpUsd Yesterday bearish break of range support at 1.5939 has opened up further downside. First support is located at 1.5752 (25th Jan low), 1.5665 (31st Dec High) then 1.5453 (prior bullish trend floor). On the upside rallies should be capped at 1.5918 (intraday high) then 1.6028 (bearish trend ceiling).

UsdJpy Very aggressive selling has pushed the pair below the 79.70 range support. Falling yields in the US continues to put pressure on the JPY. We would be looking to sell rallies below 80.50 as the support is located at 79.57 (5th May lows) then 78.83 (18th March low) then all time lows at 76.25 (17th March low). After that, the situation become difficult and we should have saber rattling from Japanese policy markets. Resistance is located at 80.38 (intraday high) 81.48 (8th July high)

UsdChf Consider the rockin’ move in EURCHF USDCHF has been oddly stable. That said with traders seeking safe-havens, CHF is back 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 0.8297 (29th June low) and finally 0.8276 (all time lows). Minor resistance is located at 0.8398 (intraday 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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