One-Day and Counting Till the EU Summit
Risk appetite came back marginally in Asian session, giving EUR and equity indices a boost. EURUSD traded up to 1.4200, while the Nikkei rose 1.17%. The rally in sentiment has been equated to President Obama’s praising the Gang of Six Senate proposal that could potentially resolve the issues around the debt ceiling. The proposal aims to raise the debt ceiling by $2.4trn, while reducing $3.7trn in deficits 2021. In theory this would cut the Debt-to-GDP ratio to 70%, although the required spending cuts and tax increases have yet to be determined.
That said, the Shanghai composite, our “canary in the coal mine”, was lower by 0.10%. Clearly the markets liked the progress in removing the uncertainly around this issue. However, we suspect that the feel good atmosphere is going to come to a disappointing end and would be looking to fade any risk rally. Thurdsays meeting critical might just be the last opportunity for euro-zone policymakers to get a handle on the region’s debt crisis. Germany’s Merkel’s comments lit up the news wires and reminded the markets how unsatisfied they are with EU official’s performance during this crisis. Yesterday, the IMF stated that the Greek debt crisis risks contaminating the rest of Europe, even if a default is avoided. Merkel told a news conference that there would not be anything as “spectacular” as a restructuring of Greek debt. We think she best sums up the current situation by saying “Thursday will help in this, but further steps will be needed.” Thursday’s EU summit is expected to pass a second Greek bailout program, halting the growing risk of contagion. While yield on peripheral bonds have slightly come in after the aggressive sell of last week, Greek 2yr yields hit a euro-area high of 40.46% today. Currently, the market is playing a guessing game as to the result of the EU summit outcome. One interesting solution which has been proposed according to an EU document is a tax on financial institutions to help finance a second Greek bailout and avoid any type of default.
Overall, there is a migration of sentiment, to a feeling now that the possibility of the EU summit will be a significant disappointment. Concerningly, anything short of a broad decisive response which could cover Greece as well as Spain and Italy could see the European crisis slip over the edge. As for today, E17 consumer confidence expected to dip to -11 vs. -10 exp, from -9.8 prior. Data wise, US existing home is forecast to come in at 4.85 vs. 4.95 exp, touch higher from 4.81 print in May.
08:30 GBP BoE Minutes 7-2 exp
14:00 USD Existing Home Sales (Jun) units mn 4.90 exp
14:00 USD Existing Home Sales (Jun) m-o-m 1.90% exp
14:30 CAD BoC’s Monetary Policy Report
The Risk Today: EurUsd With only one day away from the EU summit there is a natural short unwind occurring in the market giving the pair an intraday bullish tone. However, we are undecidedly bearish on the pair. EURUSD impressive momentum vanished Thursday and short term indicators have reverse. Initial resistance still stands at 1.4200 (15th July high) despite the brief break today, 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 Today’s BoE minutes will be key for the cable. 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 although we are seeing steady selling in European trading. Last week’s aggressive selling has pushed the pair below the 79.70 range support has slowed down but downside pressure remains. 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 demand has dried up. 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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