Risk Appetite Cools Slightly on S&P Warning

July 3 2011 by Spencer McKay in Forex Release |No Comments

The summer risk rally continued this morning in an overall quiet session. The Euro was able to run stops above 1.4575, but from there, demand dried up quickly. S&P headline which stated that any Greek debt rollover could possibly put Greece in “selective default”, hurt the feel good atmosphere. In addition, Australian retail sales came in weaker than expected at -0.6% m/m vs. 0.3% exp. and building approvals also registered a soft -7.9% vs. -0.5% exp. The disappointing numbers sent the Dec OIS down 5bps, indicating only a 1/3 expectations of a rate hike by year’s end. AUD strength quickly dried up with shift in lower in interest rate path as the AUDUSD fell to 1.0713 and AUDJPY dropped to 86.46. However, despite the marginal pull back, we suspect that risk will be in demand this week.

The Independence Day holiday in the US will give market participants another day to ponder what’s next in financial markets. The current Greece phase of the European crisis looks to be wrapping up in an orderly fashion, with a straight cash infusion into Greece (last week`s parliamentary votes clearing the way). On Saturday’s conference call, European Finance Ministers agreed to release the fifth €8.7bn tranche to Greece, however the larger €120bn bailout package was held up due to disagreement over the private sectors involvement. The foundation of the larger bailout has been divisive concerning the private sectors involvement, but its only a matter of time before a solution is to be reached. Till then, with the IMF expecting to positively rule on its own contribution this week, it looks as the in the short term, Greece will have plenty of cash to spend (avoiding government shut down and missed debt repayment). If not it seems, that Greece will fade into the background but will not disappear completely. For the next 4 years quarter by quarter traders will be scrutinizing Greek data for signs of further distress. We suspect that it will be only a matter of time before pressure on Greece is renewed and this time we don’t expect the EU to heroically swoop down with bags of cash. Over the weekend, interviews with Der Spiegel, German Finance Minister Schaeuble reiterated that Germany was making contingency plans for the eventual Greece default.

Lastly, the sell off of US treasury has markets chattering about a significant reallocation of capital. Without fears of a European collapse, does keeping barely producing assets really sound reasonable? So will the USD become the ideal funding currency or will the greenback become a growth currency play? Clearly the limited EURUSD upside markets are conflicted. Global PMI readings are broadly disappointing, however, the lone bright spot was oddly enough the US. So the focus on US payroll data will be extremely high, even in these dog days of summer. And ahead of Fridays initial jobless claims and ADP, private payrolls are also likely to provide guidance for the NFP print. While the PMI has given the US data outlook a slightly bullish tone, we suspect that the continuing eroding US employment environment will remind traders that the US economic recovery and fed tighten are a long, long way off.

With the ECB universally expected to raise rates 25bp to 1.5% this week, EUR could see some further gentle appreciations as expectations that Trichet will provide a strongly worded warning on second round inflation, will have traders thinking 1.75%. As for today, the US holiday and light economic calendar will keep trading ranges subdue.

00:00 USD Independence Day Holiday
07:15 CHF Retail Sales (Real) (May)
08:30 EUR Sentix Investor Confidence (Jul)
08:30 GBP PMI Construction (Jun) index
09:00 EUR Euro-Zone PPI (May)
00:00 CHF Switzerland SNB’s Hildebrand Speaks

The Risk Today: EurUsd With the weekly close above 1.4559 (bearish downtrend) gives this pair a bullish tone. Next resistance should come into play at 1.4580 (intraday high), a wider break of 1.4697 (7th June high) then gives scope for a wider move to 1.4940 (4th May high). Initial support is located at 1.4500 (psychological lvl) then (1.4467 (intraday low), 1.4333 (29th June low) and 1.4103 (27th June low).

GbpUsd We are finally seeing a pickup in demand for the sterling after lagging the broader risk rally. The break of 1.6119 (30th June high) resistance clears the way for a move to 1.6229 (38.2 Fibo for the sell off 1.6747 to 1.5909) then 1.6263 (22nd June high). The 200da MA will provide the initial support at 1.6043 then minor support at 1.5911 (28th June low), 1.5822 (31st Jan low) then 1.5752 (2th Jan low).

UsdJpy Looks like we are back in a sleep inducing 79.70 to 81.30 range. Last week’s directional move above 80.98 (daily cloud base) failed to hold and we quickly slipped down to 80.31. The pull-back in risk aversion and US yields have been the core driver and at least for yields we don’t see much more near term upside. We would be looking to reload shorts at 80.89 (daily cloud base). First support is located at 80.50 (1st July low)) then 80.01 (8th June low & psychological level) then 79.70 (8th June low) and 79.57 (5th May lows). As for resistance 80.89, 81.31 (2nd June high), 81.77 (31st May high) should keep upside capped.

UsdChf The assault on CHF last week was brutal but selling momentum has cooled today, although weak retails sales will not help ease concerns. Below 0.8550/54 (16th June high & bear downtrend ceiling) we remain bullish on the CHF. Initial support is now located at 0.8400 (1st July low), 0.8368 (29th June high) then 0.8297 (29th June low) and finally 0.8276 (all time lows). Resistance is located at 0.8551/53 (15th & 16th June high) and 0.8695 (long term bearish downtrend ceiling).

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