| ifcmarkets Intraday snapshot |
The powerful short-term downtrend has room for more weakness, and the 1.3893 area is the immediate target. This week's completion of a bear pennant continuation pattern has unleashed a very strong bear wave, and further downside towards 1.3850 and a 1.618 Fibonacci extension target at 1.3792 cannot be ruled out on concerted EUR weakness. Regaining ground above 1.4063 is required to provide temporary respite, but scope for corrective gains is limited. |
| The trapdoor below 1.5911 has been forced open, and a sharp bear wave towards the 1.5650/75 area is expected. The wider head-and-shoulders top pattern suggests there is longer-term scope for the 1.5380 area, as GBP bear momentum is expected to increase. Resistance at 1.5935 will look to cap corrective gains, but upside scope is limited. |
| The sharp setback is putting pressure on the 80.00 level, and there is scope for more USD weakness. USD bears have the 79.84 target in their sights, following Monday's lower high at 80.83, and the June 8 reaction low at 79.69 has become vulnerable. A recovery above 80.50 is required to question the bearish outlook, opening 80.83. |
| The corrective setback is approaching key support at 1.0570. However, AUD bulls are expected to defend this important support area, that technically stretches down to the 1.0545 area. The wider picture sustains the recently completed bull wedge continuation pattern, and a recovery above 1.0666 would prompt further gains towards 1.0725 and 1.0791. |
| Time is running out fast for the euro. Until this week, the political process in the euro zone always managed to remain one step ahead of the financial markets. The euro may have been sold heavily but investors were always willing to give the politicians the benefit of the doubt. Not any more. This was cruelly apparent on Tuesday when Italy was forced to pay much more than it has ever done for one-year paper. In other words, as doubts over Italy's budget negotiations rise and as European leaders show just how ill-prepared they are to come to the rescue of the euro zone's third largest economy, investors are exacting their toll. Higher borrowing costs will come at the worse possible time for Italy, making it more difficult for the country to service its debts and raising the risk it will follow Greece, Italy and Portugal down the road to debt crisis perdition. Other peripheral debtors are also suffering with yield spreads in just about every euro-zone country, apart from Germany and France, climbing sharply higher. But, it is the performance by investors in other global markets that suggests they are losing confidence in the political process and are preparing, if not for the end-game, then at least for a massive crisis in the single currency. Over the last few days, there has been a wholesale move out of global stock markets into government bonds, with the yield on U.S. Treasury's tumbling back under 3% for the first time this month. The price of that ultimate safe-haven, gold, has reached records highs in terms of the euro while its price in terms of the dollar was back up at nearly $1,557 an ounce this week, not far off its May 2 record high of $1,576.60. More worrying is evidence that the sell off in the euro, which has knocked 4% off its value against the dollar in the last week, is far from just a speculative attack. On the contrary, longer terms players from institutional investors, corporate players and sovereign wealth funds have all been busy dumping the single currency. At just under $1.40, the euro may still be above its January low around $1.30, but downward momentum toward that level has certainly picked up. Of course, E.U. politicians could still turn sentiment around. But as they face the much larger problem of providing a bailout for Italy, political support is flagging and the sense of urgency has faded, leaving the euro looking much more exposed than it has been at any time since the crisis started. |
| Currency markets stabilized in late-morning London trade Tuesday as vague talk of central-bank buying of peripheral euro-zone debt helped calm nerves, after the euro-zone crisis earlier threatened to spiral out of control, hammering the euro. Amid the earlier carnage, the single currency plunged to a record low against the Swiss franc and to four-month lows against the dollar and the Japanese yen as fears that Italy would be the next euro-zone country to need external funding caused investors to flee riskier assets. European stock markets were led sharply down by banking stocks and peripheral sovereign bonds were also dumped, pushing these country's borrowing costs to potentially unsustainable levels. But unsubstantiated market chatter that the European Central Bank and possibly other central banks were looking to buy the unloved government debt helped to stop the rout, enabling the euro to stabilize, for now. "While markets are now certainly short [of euro] across all three time zones and thus vulnerable to a squeeze higher, we suspect that any rallies will be met with renewed selling," BNP Paribas analysts said in a note to clients. Reflecting the contagion fears, the extra yield demanded by investors to hold 10-year Italian government bonds instead of safe-haven German bunds widened to euro-era highs of 342 basis points, before pulling back to about 310 basis points. "If this nervousness persists then we will see some really big moves over the next few days," said Paul Mackel, a currency strategist at HSBC in London. Talk of central-bank buying of Italian government debt helped steady investor nerves, enabling the euro to rebound off a low of $1.3838 against the dollar and a low of CHF1.1553 against the Swiss franc. |
| The euro fell sharply in Asia after newly elected IMF Managing Director Christine Lagarde appeared cautious about a second bailout package for Greece, making comments that swept away earlier gains following euro-zone finance ministers' efforts to calm the markets and prevent the European debt crisis from spreading to Spain and possibly Italy. "We're not yet at the stage of discussing the conditions and terms and lengths and volume," Lagarde said in a roundtable with media in Washington. The statement appeared at odds with the fact that John Lipsky, the International Monetary Fund's first deputy managing director, is meeting this week with European officials in Brussels, seeking to draft a new package for Greece. The euro tumbled on the news, breaking through key stop losses to hit a four-month low of $1.3932 on EBS, compared with a high of $1.4063 after the euro-zone finance minister meeting. At 0330 GMT, the euro was at $1.3963 from $1.4032 late Monday in New York, according to data from EBS. Traders said that the next support level would be $1.3900, just below the 200-day moving average. If that level is breached, the euro's downside could open to $1.3500 in the mid-term, said an options dealer at a major Japanese bank. Lagarde also said that Italy must do more to achieve strong growth and reduce its budget deficit. "Clearly Italy is facing issues at the moment, which are essentially market-driven," she said. The possible spread of the euro crisis to Italy was also the subject of talks by the euro-zone finance ministers. "Everything will be done to guarantee the financial stability of the euro zone and within the euro zone," Jean-Claude Juncker, chairman of the group of finance ministers of euro-zone countries, said after the meeting in Brussels. |
| Growing concerns that Italy and Spain's debt markets could echo the fate of already-bailed-out euro-zone countries sent the euro to a seven-week low against the dollar and a record low against the Swiss franc on Monday. An increased possibility of a Greek debt default came with a report that a French-led debt restructuring deal could collapse, sending investors out of the common currency toward safe havens. The euro fell below $1.40 for the first time since May 23 in its steepest one-day decline in nearly a month. The common currency also dropped to a record low CHF1.1672. The euro was able to rebound slightly from those bottoms, but was still sharply lower on the trading day. "The tide has turned toward the bearish side" for the euro, said Phil Streible, senior market strategist at futures brokerage Lind-Waldock in Chicago. He adds that most investors who are positioned long-euro are exiting those positions. Spanish and Italian bond yields spiked Monday, spooking investors that those two countries could eventually suffer the same fates as Greece, Portugal and Ireland. The new leader of the Spanish region of Castilla La Mancha said it has a budget deficit more than twice as large as had previously been thought, the latest signal about the state of Spain's current finances. Paresh Upadhyaya, Director of G10 FX Strategy at Bank of America-Merrill Lynch in New York, said 7% yields on 10-year bonds is the key threshold to watch. "This is when prior countries have come under significant stress," Upadhyaya said of the 7% yield level. Yields on Spanish 10-year bonds jumped to 5.98% late Monday from 5.65%, while Italian yields jumped to about 5.64% from 5.26%, according to CQG. "If you start dragging in bigger countries like Italy and Spain...[a bailout] just becomes ever more unpalatable," and could spark talk of the euro zone breaking up, said Robert Sinche, global head of foreign-exchange strategy at Royal Bank of Scotland in Stamford, Conn. |
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