FX Update: EURUSD tests below 1.2500 - how low can we go?

FX Update: EURUSD tests below 1.2500 - how low can we go?

EURUSD dipped to yet another low for the cycle and below the psychologically significant 1.2500 level in the early US session. The latest noise on the EuroZone revolves around the prospects and risks of a breakup, with former Fed chairman Volcker weighing in on the issue and a Spanish newspaper reporting that Sarkozy threatened to leave the Euro during negotiations with Merkel ahead of the announcement of the bailout package. Spreads widened on Greek debt today by the most since the announcement of the bailout package.

Though all of the news flow remains very Euro bearish, we are beginning to wonder at this point whether the market has pushed about as far as it can push in the near term on the bearish Euro story as bearish sentiment on the Euro is off the charts. Where will the market find new sellers of the currency now that a stabilization package has taken the EuroZone meltdown story off the front burner and put it off for another day? Certainly the multi-year lows at 1.2330 are the next key test. If this area isn't able to hold the pair, then the parabolic price action might take us all the way down to 1.2000 or even lower - as a lack of bids in the market could see a climactic sell-off before we find a significant bounce. Once price action goes into a parabolic decline, the market finds a bottom quickly, though sometimes at levels very far from where they started. 

Elsewhere, commodity currencies were lower on poor risk appetite after yesterday's weak close in the US. USDCAD touched above 1.0300 as oil traded below 74 dollars a barrel and AUDUSD was having a look at sub - 0.8900 support in today's trade as well.

UK: Ugly coalition to be a brief affair?
The awkward UK Tory/LibDem coalition that it is attempting to move forward has former BoE member David Blanchflower (whose loud and dovish voice was proven so right as the financial crisis hit the UK with full force in 2008) predicting that the coalition will only last a matter of months due to an unbridgeable ideological gap. See the commentary here, which includes Mr. Blanchflower's Keynesian exhortations for the BoE to print more money. The point is an excellent one and the Tories might do well to call for a snap election if they have the ability to gain the least bit of momentum in the coming months, as they only need the 20 additional seats to form a traditional majority government that can move to put its program through without having to kowtow to a partner at the opposite end of the ideological spectrum. This is not necessarily a tradable scenario at present, but something to keep in the back of our minds in the months to come.

Chart: USDJPY again
USDJPY is having a go at the critical Ichimoku cloud support and the 55-day moving average (red line). Today's close price looks critical for an indicator on where the yen is headed. If we are to go by past behavior, then bond markets suggest that JPY should head stronger from here, though that correlation has been called into question of late.

Looking ahead
The market hardly noticed the in-line US advance retail sales numbers todayLater today we have the preliminary US University of Michigan Confidence number, a number that has flattened and even headed slightly lower while the US recovery has supposed move forward. These confidence surveys are extremely correlated to the employment situation. Market sentiment still seems very fragile after the shocking volatility event from late last week and on the issue of the confrontation between US lawmakers/ Obama administration and the big banks.

Next week offeres a glimpse at how the US housing market is faring in May, as the NAHB survey is set for release already on Monday. We also have Australia's May meeting minutes to kick off the Asian session on Tuesday and in Europe, we have the latest inflation numbers from the UK and the German ZEW survey. We'll discuss the rest of next week's economic calendar on Monday.

Economic Data Highlights

• New Zealand Apr. REINZ House Sales fell -16.2% YoY vs. -8.0% ni Mar.
• New Zealand Apr. Housing Price Index fell -0.4% MoM
• New Zealand Mar. Retail Sales rose +0.5% MoM and ex Auto 1.1% vs. +1.1%/1.5% expected, respectively
• New Zealand Apr. Non-resident Bond Holdings fell to 63.2% vs. 63.6% in Mar.
• Canada Mar. New Motor Vehicle Sales fell -4.2% MoM vs. -4.0% expected
• Canada Mar. Manufacturing Sales rose 1.2% MoM vs. 1.0% expected
• US Apr. Advance Retail Sales out at +0.4% and +0.4% ex Autos and Gas, vs. +0.4%/+0.3% expected, respectively
• US Apr. Industrial Production out at +0.8% MoM vs. +0.7% expected
• US Apr. Capacity Utilization rose to 73.7% vs. 73.8% expected and 73.1% in Mar.

Upcoming Economic Calendar Highlights

• US May preliminary University of Michigan Confidence (1355)
• US Fed's Evans to Speak (1740)
• US Fed's Kocherlakota to Speak (Sun 0400)
• New Zealand Apr. Performance of Services Index (Sun 2230)
• UK May Rightmove House Prices (Sun 2301)
• Japan Mar. Machine Orders (Sun 2350)
• Japan Apr. Domestic CGPI (Sun 2350)