IG Markets Forex thoughts

IG Markets Forex thoughts

EURUSD

Overnight, the euro initially rose before falling ahead of tonight’s European bank stress test results, plus comments from Ben Bernanke where he appeared to squash speculation of any imminent stimulus measures to boost the lacklustre US economy. Ending the Australian session around the 1.4180 level, the euro was initially bid up, reaching an overnight high of 1.4258, before sliding back to close at 1.4143 as US equities finished near their lows of the day. When forex markets re-opened for Asian trade, the euro managed to peg back some lost ground moving into the 1.4160 range where it has remained for much of the day. Its next major directional catalyst will come tonight with the release of the stress test results of 91 European banks. This will provide some much need clarity over which backs are adequately positioned to whether any continued debt shocks and those that will require additional capital. The pair currently sits at 1.4167

USDJPY

Overnight, USD/JPY traded between 78.95 and 79.27 with the pair ultimately finding buying support below 79.00. In Asian trade, it was S&P’s turn to shake confidence in global markets and the USD, by placing the US AAA rating on Creditwatch negative, with one official suggesting the chances of a US rating downgrade in the next 90 days has risen considerably, even if the debt ceiling is raised. As a result of these comments, we saw USD/JPY and USD/CHF fall around thirty pips, but they soon managed to recover the lost ground. There are two main focuses for USD/JPY at present; the US debt ceiling debate, and whether the BoJ are likely to step in and intervene in the forex market. We feel that whilst the Japanese government and monetary authority are certainly concerned by the JPY appreciation, the fall we have seen has not been disorderly enough to warrant intervention. However, the chances do increase if USD/JPY pushes convincingly below 78.00; interestingly today’s BoJ June minutes suggested two members said more easing may be needed. Last night some marginal progress was made regarding the debt ceiling, with the White House suggesting both parties have agreed on US$1.5 trillion in spending cuts All eyes now fall on President Obama who is scheduled to give a press conference on the issue tonight. Key support still comes in at 78.44.

AUDUSD

Overnight, the AUD experienced a choppy session, as early risk appetite was eroded after Ben Bernanke appeared to backpedal from suggestions the previous day that the Federal Reserve was prepared to act with further accommodative stimulus. The reality is it would probably step in with further accommodative policies if there was a dramatic deterioration of the global economic landscape, but in the near to medium term, the Federal Reserve sees this as unlikely. Having ended Australian trade around the 1.0720 mark, the AUD edged up to a high of 1.0785 before drifting to close at 1.0724, as US equities finished near their session lows. Upon reopening for Asian trade the AUD edged up into the 1.0730 range where it has remained for most of the day.

GBPUSD

In Asian trade, GBP/USD moved between 1.6133 and 1.6176, marginally underperforming the euro and the Scandinavian currencies with a 0.1% gain. The sterling got a bit of a boost when S&P put the US rating on Creditwatch negative, but given Moody’s had effectively done the same thing the day before, the upside was limited. The short-term direction of cable will undoubtedly be driven by the price action in EUR/USD, as economic data in the UK is light, with trader’s full attention being directed at tonight’s EU stress tests. Whilst it seems all British banks are sufficiently well capitalised and should easily pass, a failure by any key European bank could install some selling in risk currencies, with sterling coming under pressure. The EU stress tests will be released in three phases (starting at 2:00am Melbourne time), and the market will be keen to see who needs to recapitalize, and how much credit and sovereign bond exposure they have on their books. Given the previous stress tests were a complete farce with Irish banks needing bailouts directly after passing, the credibility of the tests will be key. The overall price action of GBP/USD is still bearish, and macro accounts are still expecting downside. Traders are focusing on 1.5906, which could expose further falls to 1.5781.

ENDS

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