Forex - FX Market Commentary – July 2011

Euro weakness persisted last week with Friday’s better-than-expected banking stress test results only momentarily helping its fortunes. Only eight out the ninety banks tested failed the tests which are designed to gauge the health of the financial system in the event of an economic meltdown. Nevertheless, the news brought little solace to the broader market place with many questions just how ‘stressful’ these test actually are. The European Banking Authority priced the total shortfall of 2.5bn-Euros – however credit Suisse were quick to point out their belief the actual shortfall is actually 18 times greater than the EBA’s estimates requiring an additional 45bn-Euros with 14 banks deserving of the failed stamp.
The Euro lost near to 0.8 percent over the week against the greenback, but the real story can be seen by looking at its performance against the perceived safety of the franc. The Swiss franc continues to strengthen against the greenback with the EURCHF pair falling to another all-time low last week of CHF 1.1492 and falling even further in early trade to fresh all-time lows of 1.1375.
Likewise the US dollar also forged a new all-time lows against the Swiss franc this morning falling to lows of 0.8046.
The incessant rise of the Swiss franc has Swiss National Bank watchers on alert as the bank continues to express concern over its unprecedented appeal as a safety play. The persistence of the Euro-American debt concerns further increase the likelihood of Swiss franc strength, thus fueling speculation the SNB may impose capital controls to stem the rising currency. Of course another possibility is government relief directly to exporters or direct currency intervention. The latter would not be the favored option considering the losses sustained by the SNB as a result of directly intervening in the currency market. The central banks attempts to halt the strengthening currency lost CHF14bn in the first half of 2010.
We only need to look to the unrelenting rise of the Japanese Yen for clues in the sustainability of direct intervention.In response to the horrific events in Japan earlier this year – the G7 jointly intervened to stem the Yen’s advance. The threat of large scale repatriation of capital was enough to induce G7 nations to conduct joint intervention – but the action failed to have a sustained impact. These safe haven attributes have once again seen the JPY strengthen against its major rivals most notably making a convincing break to the downside of the ¥80 to the US dollar.
Like its neighbour across the Atlantic, the US is not without its potential pit falls. From debt ceiling woes to QE3 conjecture, there’s a veritable treasure trove of themes that could further devalue the greenback in the week ahead. Further complicating the US dollar matrix is the strengthening argument inflation is beginning to take hold - with Friday’s CPI numbers showing core inflation which excludes food and energy rose 0.3 percent in June. Although headline inflation declined 0.2 percent, (attributed to a drop in energy prices) core inflation rose at an annual pace of 1.6 percent once step closer to the Fed’s target of close to but below the 2 percent level. Headline inflation grew at an annual pace of 3.6 percent. The university of Michigan consumer confidence data sank below expectations to record a drop to 63.8 in June from a previous 71.5. Economists had tipped a rise to 72.2.
Considering this inherent lack of faith in fiat currency, it’s no coincidence the price of gold continues to forge new all-time highs. Last week spot Gold rose to highs of $US1,595.00 a troy ounce and has kicked off the week in spectacular style making new highs of $US1,599.00 a troy ounce.
It’s a fairly light week for economic data in the US this week with feedback on the housing sector the primary focus. The local week ahead will also be light on economic directives with the exception of to the RBA minutes for July, which will no doubt keep interest rate talk in the headlines.
We have another European summit coming up on Thursday which is expected to provide an understanding on how Greece’s custodians plan to structure a second round of financial assistance. Whatever the summit may bring, time is running out – the threat of contagion has amplified and threatens to spread to the heart of Euro-zone.

Source: http://www.forextv.com

FX Market Commentary – July 2011

Despite moderate Euro strength overnight the appeal of the Aussie dollar remained subdued with price action capped in a tight range below 107.5 US cents. With US markets closed for Independence Day, a decline in market participants made for light volumes resulting in general risk-neutral environment which provided little impetus to resurrect the Aussie following yesterday's slide in the domestic session.

Late yesterday the Aussie came under pressure alongside the Euro after ratings agency Standard and Poor's warned an extension of debt maturities held by private investors - although voluntary - may still warrant a 'selective default' rating. The Euro recovered after briefly slipping back through US$1.45 levels yesterday and maintained a slow upward trajectory overnight despite S&P's warning. The forthcoming rates decision, which is expected to see the ECB increase rates to 1.5 percent, gave participants a welcome distraction from the threat of default. Nevertheless, one can expect this threat to rare up again given the shock waves it would send through global markets. The European Central Bank has said they will not accept Greek debt as collateral in the event of a default rating. According to an article in the financial times citing a senior official, the ECB will continue to accept Greek debt as collateral unless all three major ratings agencies declare Greece to be in default.


The primary risk event for the local unit today will be the RBA interest rate decision due for release at 14.30 AEST. Although the decision will almost certainly see the RBA remain on hold at 4.75 percent, the usual post decision conjecture should prove to induce movement on the local unit as participants look to clues into the RBA's next move. Nevertheless, with much of the RBA's lukewarm rates outlook well and truly priced in the market, we expect the primary directive for the Aussie dollar to remain at the mercy of global risk trends. Earlier today we have the trade balance for May and HSBC Chinese PMI (Services) due for release. At the time of writing the Aussie dollar is buying 107.4 US cents.

Source: http://www.ibtimes.com