Dow Jones Newsletter 20th July

WEDNESDAY, JULY 20, 2011

ifcmarkets INTRADAY SNAPSHOT EUR/USD Remains positive for a return to Tuesday's 1.4217 high. The recovery off 1.4108 will look to force a break above 1.4176 in order to get at the 1.4217 high, and threaten further gains to the July 14 reaction high at 1.4282. Corrective downside risk exists to the 1.4068 support area, but only below there would begin to question the validity of the recovery from Monday's 1.4014 bear failure low. GBP/USD Remains trapped within a bull pennant continuation pattern between 1.6006 and 1.6192. More of the same is expected, as Tuesday's setback off 1.6178 threatens a break below 1.6105 to challenge support at 1.6057. However, an upside resolution is favored at this stage during the coming sessions, opening 1.6262 on a break above 1.6192. USD/JPY Tuesday's bullish outside day prompts a recovery that has scope to 79.60. However, a break above Wednesday's Asian session high at 79.32 is required to pave the way to the July 14 spike high at 79.60. Caution lies in the form of a head-and-shoulders top formation on the 60-minute chart, suggesting a setback to 78.88 is required before forming a base and prompting a recovery back to 79.32. AUD/USD Stages a strong recovery off 1.0561 to bring the focus back onto the range high at 1.0804. Projected resistance at 1.0768 needs to be broken in order to open the 1.0804 high, as AUD bulls look to regain control of the short-term. Weakness towards 1.0650 will attract support, and only below 1.0608 would expose Monday's 1.0561 low. ifcmarkets FOCUS The risk of debt default may be declining on either side of the Atlantic, but it is far from certain whether the euro or the dollar will come out best. In a normal world, the reassurance that the U.S. can continue servicing its debt uninterrupted should make the U.S. currency attractive again, especially given the recent improvement in the country's growth prospects. The protracted negotiations by the U.S. Congress on how to increase the country's debt ceiling have certainly provided a drag on the dollar for some. The dollar index may have rebounded from its recent low but there is little sign of the index staging anything like a bounce. More evidence that the dollar simply isn't benefiting as expected came Wednesday after reports from Washington that President Obama is reconsidering a bipartisan debt solution that includes $3.7 trillion of spending cuts and tax increases. Of course, the deal still faces stiff Republican opposition to tax increases and may not resolve the country's debt ceiling for the longer term, but it does remove the threat of the U.S. running out of money Aug. 2 and facing a downgrade by credit ratings agencies as it is forced into default. On this side of the pond, meanwhile, it looks as if Greece will also avoid default, thereby removing the threat of nasty euro losses as the euro-zone debt crisis escalates. Although there are widespread objections from the banking community, European politicians appear to be giving more support to a proposal for a new tax on banks that would help to pay for a bailout for Greece. Not only would this second package for Athens include private-sector debtors, rather than just the public sector, but it would mean that ratings agencies wouldn't consider the country in technical default. More details of the package are expected to emerge Thursday after being rubber stamped at a leaders summit in Berlin. Of course, this doesn't let Greece off the hook and the threat of contagion will hardly go away if the borrowing costs for other peripheral sovereign borrowers, such as Spain and Italy, continue to rise. Nevertheless, there are signs that in a market that is still being driven largely by risk sentiment, the euro may well come out of this on top. EUROPE The euro marched higher in European trading hours Wednesday, taking other risk-sensitive currencies such as the Canadian dollar with it, on rising hopes of a successful outcome to Thursday's crucial summit of euro-zone leaders. After treading water early in the session, the single currency sprung to life after reports European officials are considering the use of precautionary credit lines to prevent contagion to weaker members. Another option on the table is using funds from the European Financial Stability Facility to recapitalize banks, Bloomberg reported, citing a person close to the talks. The news lifted the euro above $1.42 against the dollar, while Italian and Spanish bond yields fell and European stock markets built on their opening gains, a sign investors are becoming more optimistic about a positive outcome at the meeting. "Everyone is expecting a good summit resolution--something big," said one trader. The commodity-linked currencies of Canada, Australia and New Zealand all gained as investor confidence grew. However, nothing is confirmed and there are still risks ahead, with a preparatory meeting due Wednesday delayed to Thursday morning, pushing back the starting time of Thursday's summit to 1100 GMT, according to a person close to the talks. Before then, the leaders of powerbrokers France and Germany meet in Berlin around 1500 GMT. "Markets will remain at the mercy of headlines relating to what the summit may or may not deliver until the event concludes--now reported to be very late tomorrow," said Adam Cole, global head of foreign exchange at RBC Capital Markets. In terms of upcoming economic data, there are euro-zone consumer confidence and U.S. existing home sales figures at 1400 GMT. The Bank of Canada's monetary policy report will also be closely watched after a hawkish-sounding central bank Tuesday. ASIA The dollar and the euro held steady against the yen in Asia on Wednesday as progress in the debate over raising the U.S. debt ceiling appeared to reduce the risk of any U.S. credit rating downgrade, supporting risk sentiment. Solid U.S. housing figures and some strong earnings results Tuesday also continued to support riskier assets, market participants said. U.S. President Barack Obama on Tuesday backed a $3.7 trillion deficit-reduction plan as "a very significant step" after it gained fresh momentum from a bipartisan group in the Senate. Obama cited general progress in the debt-ceiling and deficit-reduction talks and asked Congress to begin crafting a final plan Wednesday. "Optimism over the U.S. debt situation has increased" said Teppei Ino, senior analyst at Bank of Tokyo-Mitsubishi UFJ. "Market participants have become more willing to take on risk." Still, uncertainty over European sovereign debt woes continued to weigh. Market participants are focusing on a euro-zone emergency summit meeting Thursday. Senior finance ministry officials and aides to the heads of government will meet Wednesday in Brussels to try to hammer out a deal. French President Nicolas Sarkozy is set to travel to Berlin on Wednesday to meet German Chancellor Angela Merkel to find a compromise solution before the summit. "It would be difficult to produce an ultimate solution (for Greece) this time," said Yuji Kameoka, managing director of foreign exchange at Daiwa Securities. "The key is whether the outline of a rescue program will take shape, even gradually." Various proposals are on the table to trim the amount of debt Greece must repay to creditors. One option is to use public money to finance Greece, but collect part of it through a tax on banks or other financial-system players. Koji Fukaya, chief currency strategist at Credit Suisse Securities Japan, said hopes for an agreement on financial aid for Greece may lift the euro slightly against the dollar ahead of the emergency summit Thursday. But even if short-term problems in Greece subside, "the next concern is Italy," he said. WORLD The euro gained support Tuesday as investors latched onto wisps of optimism that a new aid deal for Greece was in the works. Speculation moved through the market that Europe's big players, including Germany and the European Central Bank, will come to terms on a new deal for Greece--despite the numerous issues that seem to remain unresolved. Euro-zone leaders will gather at an emergency meeting in Brussels Thursday to try to craft a solution to Greece's debt woes and help prevent contagion to other euro-zone nations. "I think the Europeans will come to a solution to appease the markets," said Peter Schiff, chief executive of Euro Pacific Capital. "I don't think it will be a long-term fix, but it will be a Band-aid that the markets accept and the euro will gain more ground." Both the dollar and the euro gained against safe-haven currencies such as the Swiss franc and the Japanese yen. The euro had the advantage over the dollar. "Another boost for the euro is and will be the ongoing debt drama in the U.S.," said Joseph Quinlan, chief market strategist with U.S. Trust Bank of America. "This has made investors skittish about buying more dollars." The common currency didn't lose this edge when President Barack Obama praised a proposed $3.7 trillion deficit-reduction plan, raising the possibility that the debt-ceiling deadlock might be ending.