Greek Situation Remains Important Focus

by Darrell Jobman

EUR/USD

The Euro remained under heavy pressure in European trading on Thursday and retreated to lows below 1.41 against the dollar as Euro-zone credit default spreads continued to rise on default fears and it struggled to gain more than limited relief.

The Greek situation remained an extremely important focus as news headlines continued to dominate market moves. There were further disagreements over possible solutions for avoiding a Greek default with Germany still insisting that some form of debt restructuring will be required to secure a fresh rescue package.  ECB President Trichet stated that markets must avoid compulsion in any bond restructuring and avoid triggering a credit event and there were further concerns over further damage to the European banking sector.

The indications were that the IMF would agree to pay the next instalment by early July, but this would be dependent on fresh austerity measures.  Protests continued in Greece and there were further resignations from the government. The Prime Minister will, therefore, find it extremely difficult to find approval for tightening measures and this will also jeopardise any agreement that can be secured.

German Chancellor Merkel and French President Sarkozy will meet on Friday to discuss developments and EU Finance Ministers are due to meet on Sunday and Monday as market pressures increase. 

There was a stronger than expected reading for US housing starts and building permits also rose to a five-month high which provided some relief to the recent disappointing data. There was also a decline in jobless claims to 414,000 in the latest week from 430,000, but there was a sharp decline in the Philadelphia Fed index to a two-year low which will maintain fears over the economic outlook.

There will be caution ahead of the Federal Reserve meeting next week and a reluctance to hold positions contributed to further volatility.

Yen

The dollar failed to break above 81 against the yen during Thursday and retreated to lows near 80.50, although selling pressure was contained. Although US yields stabilised to some extent following the US housing data, interest-rate support was still lacking which curbed dollar support.

The Japanese currency continued to gain some support on defensive grounds as risk appetite remained weaker with Sterling testing support below 130. A further decline in regional bourses on Friday also triggered defensive yen demand.

The latest Bank of Japan minutes reported that two members saw the need for a further relaxation of monetary policy. The yen will still be hampered by a lack of confidence in the economy and weak fundamentals with the dollar holding near 80.50 in Asia on Friday.

Sterling

There were rumours that the UK retail sales data would be stronger than expected, but in the event there was a weaker than expected 1.4% decline in sales for May. Although recent data has been distorted by holidays, the ONS warned that there had been a deterioration in spending trends.

This evidence also suggested that there was weaker than expected data from the major retailers which will maintain fears over the economy as a whole. In this environment, there were further expectations that the Bank of England would maintain interest rates at extremely low levels which undermined the UK currency. There was a decline to test support levels close to 1.61 against the dollar and Sterling failed to gain much respite as the technical outlook also deteriorated.

Risk conditions will inevitably remain important in the short term and Sterling will tend to be vulnerable if there is a further deterioration in confidence. There will be particular doubts surrounding the UK banking sector given the underlying stresses.  

Swiss franc

The National Bank left interest rates on hold at 0.25% at the quarterly monetary policy meeting and also slightly lowered its inflation forecast for 2012 and 2013. There was little immediate franc reaction with the dollar blocked near 0.8550 against the franc.

In its press conference following the meeting, bank officials expressed unease over the franc’s level, but also stated that there would be no intervention at this stage to weaken the currency.

The franc continued to gain support on defensive grounds as fears surrounding the Euro-zone sovereign-debt situation intensified as the Euro dipped to record lows below 1.20. The currency remains substantially over-valued and there were further volatile moves given a reluctance to hold aggressive positions. 

Australian dollar

The Australian dollar was subjected to renewed selling pressure during the European session on Thursday and tested support below the 1.05 level against the US dollar. There was buying support below this level and rallied back to the 1.0570 area before selling pressure resumed.

Risk conditions tended to dominate and the sovereign-debt fears continued to unsettle confidence which also undermined the Australian dollar. Commodity prices were generally weaker and Asian equity markets also came under further pressure which hampered the Australian currency.