Euro attempted a recovery last week as the drama on Greece continued. There were talks of "reprofiling" or "soft restructuring" of Greece debt as well ECB's opposition to such an idea. However, the common currency failed to sustain gain and was sold off sharply on Friday on fresh downgrade in sovereign debt ratings. Fitch downgraded Greece's rating by three notches from BB+ to B+, four notches below investment grade. Fitch warned that any move to extend the maturities of Greece bonds is considered a "default event" while the current B+ ratings incorporates expectations that "substantial new money" will be provided to Greece by the EU and IMF. Besides, Norway, Iceland and Liechtenstein froze payment of altogether 235m kroner of European Economic Area grants to Greece as it's "unclear whether the money already transferred to the Greek authorities was forwarded to the appropriate recipients."
Euro was seen broadly lower on Friday on the above news. Note that EUR/CHF is back pressing all time low at 1.24 level and is set to break it this week. EUR/AUD is probably heading back to record low of 1.2925 too. While the common currency managed to close the week higher against dollar, yen and sterling comparing to the prior week, it looks vulnerable to deeper decline. EUR/USD will likely head back to 1.4 level this week. Also, XAU/EUR was clearly strong on Friday and should take out 1075 record high soon.
Dollar was steady in range as commodities consolidated last week. Dollar index edged higher to 76 but turned sideway since then. The minutes of the FOMC meeting on April 26/27 showed some interesting points to note. Firstly, some voting members said they would only support another asset purchase program, i.e. QE3, only if there is a "significant change in the economic outlook, or the risks to that outlook". Secondly, "few" members argued that inflation outlook and economic conditions would warrant the first move of stimulus exit this year. However, thirdly, another camp also noted that early exit might "unnecessarily damp the ongoing economic recovery." Meanwhile, regarding exit strategies, "a majority of participants preferred that sales of agency securities come after the first increase in the FOMC's target for short-term interest rates."
A lot of discussion was carried out on what to do with the $2.7T in assets that the Fed is holding. Generally, "many of those participants also expressed a preference that the sales proceed relatively gradually." The first step, would involve allowing the $900b mortgage backed securities to mature without reinvesting the proceeds. Then, Fed would let the $1.5T treasury holdings gradually run down. And at some point, Fed will raise interest rates and then will actively sell its mortgage holdings in a steady program.
The minutes of May 5 BoE meeting revealed 6-3 vote split to left rates unchanged at 0.5%. The split was as market expected with Sentance maintaining his call fro 50bps hike while Dale and Weale voted for 25bps hike. Posen continued his call for additional asset purchase. One important point to note is that Dale and Weale, this time, said that the decision was finely balanced, arguing that they're now less hawkish than before.
BoJ left rates unchanged at between 0% and 0.1% on unanimous vote. The bank noted in the statement that the economy is facing "strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster." However, the banks still expect the economy to "return to a moderate recovery path from the second half of fiscal 2011 as supply-side constraints ease and production regains traction." Hence, the bank decided to refrain from adding additional stimulus. The JPY 30T credit program and the JPY 10T asset purchase program was maintained unchanged. Note that Deputy Governor Nishimura dropped the call for expand the asset purchases too.
RBA signaled in its minutes that "if economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point." However, there is urgency noted for rate hike and no indication on the timing. Near term outlook in Aussie will likely be highly correlated to gold prices which remains vulnerable to another fall after consolidating around 1500 level.
Technical Highlights
Dollar index's recovery lost momentum after hitting 76.00 and turned sideway. Another rise remains in favor with 74.80 minor support intact and current rebound from 72.70 should extend to medium term falling trend line (now at 76.85). At this point, we'd expect strong resistance from the trend line to limit upside and bring down trend resumption. Below 74.80 will flip bias back to the downside for a retest on 72.70 low first. However, sustained trading above the trend line resistance would argue medium term bottoming and should bring stronger rise to 38.2% retracement of 88.70 to 72.70 at 78.81 instead.
XAU/EUR rose sharply to as high as 1070.46 last week and initial bias remains on the upside this week for 1075.30 resistance first. Break will confirm up trend resumption and should target 100% projection of 953.5 to 1041.7 from 998.55 at 1086.7. Nevertheless, as XAU/EUR is possibly developing into a rising wedge pattern, we'd expect strong resistance at upper trend line (now at 1092.6) to limit upside and bring near term reversal.
EUR/AUD's sharp fall on friday suggests that decline from 1.4336 is possibly resuming. Initial bias will remain on the downside this week and break of 1.3227 support will confirm this bearish case and target a retest on 1.2925 record low. After all, there is no signal reversal and whole down trend from 2.1127 (2008 high) should still be in progress.
The Week Ahead
Here is a summary of the important events to watch this week:
- Monday: Eurozone PMIs
- Tuesday: German GDP final, Ifo business climate; UK public sector net borrowing: US new home sales
- Wednesday: BoJ minutes; German Gfk; UK GDP revision; US durables
- Thursday: Swiss trade balance, employment level; US GDP revision, jobless claims
- Friday: Japan CPI; UK nationwide house price; Eurozone M3, German CPI flash; Swiss KOF; US personal income and spending, pending home sales
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