Forex Reviews

Overnight markets are again characterised by a combination of independent EUR weakness and generally diminishing appetite for risk. Although off the low ($1.4015), EUR/USD is still 100 pips down from Friday’s close. Ostensibly, EUR weakness is attributed to the limited credibility of Friday’s bank stress tests and is mirrored in wider peripheral spreads (Italy +13 bps; Spain +20 bps). More generally, equities are soft (US futures -0.6%), leaving JPY the top performing currency in G-10, with USD not far behind. SEK is the worst performer, though this has more to do with general risk appetite than the Riksbank minutes, which added little to the policy debate. White House and Republican leaders appear to have made little progress over the weekend in striking a deal to raise the debt limit, which is also weighing on risk sentiment. The House plans to vote on July 19th to increase the debt ceiling. Press reports suggest that President Obama has already moved to the centre...

  The Euro-zone stress tests have been revealed and the results are likely better than expected as only 8 banks failed the stress tests. Here are some details: Out of those 8 banks – 5 Spanish, 2 Greece, 1 Austrian failed. 16 banks passed the tests “narrowly.” €2.5 billion of capital needs to be raised. Under the adverse scenario, the banks would lose €400 billion which represents 40% of core capital. Here is the Summary Report from the EBA: The EUR crosses were mildly positive in the 5 minutes after the release, but the EUR/USD after testing 1.4188, fell back down to where it was trading before the release. The low figure that will be needed to be raised is much below the expectations of the market, which was pegging a figure between €20 billion – €35 billion. That can create some concern in regards to the validity of the tests, and we will be looking at the 16 banks that passed narrowly – and the market may as well...

Though the hurdle to QEIII is exceptionally high, and Bernanke does NOT anticipate another round, he did not slam shut the door on doing more. The conditions aren’t in place, but they also can’t be dismissed. This seems to also be the situation in the debt limit debate. The widespread view is that the debt limit will be raised, and nasty alternatives can’t be dismissed, even if the chance is low. By leaving the QEIII door open, Bernanke gave hope to stocks, and weighed on bonds and USD. The market tone was rather hopeful even before Bernanke based on China’s above expected Q2 GDP (9.5% y/y, cons: 9.3%) with cyclical/commodity currencies outperforming and the safe havens lagging. CHF though gained steadily through the NA session and is now at or near record levels versus USD, EUR and GBP. Comments by the SNB’s Jordan that raised the spectre of action should deflation risks re-emerge was completely overlooked, as the deflation risks...

The Euro has seen massive moves lower to start the week and this continued during the Asian session after Monday’s meeting between EU finance ministers did little to ease the general concerns that are being seen in the current market environment.  The EUR/USD has seen large increases in volatility, now trading at 1.3930-1.4060 with the USD/JPY dropping to 80.00-80.40.  Treasury auctions in Italy Thursday will be the next event risk for the Eurozone, as analysts will then have an idea of the level of confidence the market has for the region. Yesterday, 10 year bond yields in Spain rose to 6%, which is a first since the adoption of the Euro.  German bunds, on the other hand, are seeing the opposite reaction as investors look for safe have alternatives for treasury investments.  European equity markets also saw significant declines, and the S & P 500 followed suit, with a drop of -1.81% for the session.  In macro data, we will see...