The euro rallied against the US dollar overnight in the Asian trading session, driven in part by expectations that today’s EU summit will put together a bailout package for Greece. Currency traders have been punishing not only because of the Greek fiscal deficit but also on fears that the problem will spread to other member states, in particular Portugal, Spain & Italy. News that Angela Merkel is opposed to any IMF intervention for fear of the destabilizing effect on both European and global markets did help to keep the euro mildly buoyant. In today’s trading the EURUSD has managed to touch USD1.38 price point but is keeping to a very narrow range until release of any statement from the EU summit.
Overnight also saw Asian markets advance for a third day in a row, but it was the performance of the Aussie dollar dollar & bond yields following stellar employment numbers (52,700 jobs added & unemployment down to 5.3% from 5.5%) which saw a rush of bets that the RBA will move to lift interest rates at next month’s policy meeting. AUDUSD rose almost 100 pips and three year bond yields jumped 11 basis points to 4.64% on the news. In addition the Australian government has now removed bank depositor protection, a move seen as a further signal that the Australian economy is moving swiftly out of recession.
Sterling was the biggest loser amount the majors on Wednesday following Mervyn King’s comments that the bond buying programme, which the BOE had halted last week, could be restarted in the event of the economy requiring a further stimulus. This helped to push cable down to a low of USD1.5570.
Despite yesterday’s falls in both the Dow & S&P which saw them just hold onto the psychologically significant 10,000 and 1,000 levels respectively, European equities have managed to hold onto their gains as markets wait for the EU statement and expectationhat ta solution will be forthcoming for Greece. As a result we may see a short squeeze higher for the eurodollar. European traders and investors also responded favourably to Ben Bernanke’s statement yesterday in which he reiterated the Fed’s desire to keep interest rates low for an “extended period”. Traders and investors can also take some comfort from one of my favourite indicators, the VIX (aka the “fear” index) which since the shooting star candle of Friday has calmed somewhat and, given the apparent resistance in the 28-30 region, we may now see a further decline in the index as a result suggesting markets are now beginning to calm after the recent turmoil. Always remember that the VIX is an inverse chart, in other words the further it falls the more complacent traders and investors are becoming and hence the increasing likelihood of a significant market shift of direction. In other words this is a contrarian indicator – in others buy when its high and sell when its low – which is the exact opposite of what the majority of traders, investors and fund manager do.
Fundamental news today is taking second place to the EU summit but this afternoon sees the US unemployment claims which are expected to come in at 460k against a previous of 480k, a small reduction while in China we had the CPI data which came in lower than expected at 1.5% against a forecast of 2.2% whilst PPI came in higher than expected at 4.3% against a forecast of 3.9%. CPI data is the consumer price index and provides a view on average consumer prices for a variety of goods & services which then give an indication of overall inflation, reducing the prospect of a rise in interest rates in the short term. PPI is the equivalent for producers.
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