Market Review – 23/07/2010 22:34 GMTEuro ends mixed in roller-coaster session after European stress-test results
The single currency went through a roller-coaster session on Friday, price initially traded calmly in Asia ahead of the much-awaited European stress-test results at 16:00GMT, the pair fell just ahead of European opening on report that several of Spain’s 18 savings banks had failed the stress test. Euro remained under pressure in Europe on news report that Moody’s had placed Hungary’s sovereign rating under review for downgrade. Hungary’s PM Viktor Orban said on Thursday he would not renew a deal on an IMF safety net and would row back on a commitment to cut the budget deficit to EU-prescribed levels next year, price fell to 1.2860. However, euro then rallied briefly to 1.2966 after release of much stronger-than-expected German Ifo index. German business confidence in July had risen to 106.2 from 101.8 and Ifo said this was the largest increment since German reunification.
Euro later tumbled to an intra-day low of 1.2794 in New York morning after Bloomberg reported according to The Committee of European Banking Supervisors (CEBS), the stress tests took into account of the potential losses only on government bonds the banks trade rather than those they are holding to maturity, traders interpreted the tests lacked credibility (not stringent enough) and ignored the potentially large book losses (in case of a sovereign debt default) on the majority of banks’ holdings of sovereign debts. However, the pair staged a strong rebound to 1.2909 after the release of stress-test results which showed only 7 (5 from Spain, 1 from Germany and 1 from Greece) of the total 91 banks had failed the tests under the most adverse condition. Price dropped again after these results but buying interest at 1.2908 lifted euro up in late NY session as investors digested European bank stress-test results and the firmness in U.S. major stock markets boosted risk appetite. The Dow rose by 102 points or 0.99% due to the solid margins from Verizon Communication Inc. and a dividend hike by GE Co. and closed the day at 10,425.
European Central Bank Vice President Vitor Constancio rejected suggestions that stress tests of European Union banks had not been stringent enough. He told reporters at a press conference in Brussels after the release of the results that the stress tests are ‘severe, rigorous and very comprehensive.’ He admitted ‘we have not included a default of any country,’ and explained ‘we have not done that, because we don’t believe there will be a default’.
Versus the Japanese yen, although the greenback initially dropped from 87.23 to an intra-day low of 86.73 in Asian morning on active sales by Japanese exporters following Thursday’s strong rebound from 86.34, the pair ratcheted higher in Europe and later hit an intra-day high of 87.51 in NY mid-day, just shy of this week’s top at 87.58 (Tuesday) on return of risk appetites due to firmness in U.S. equities. The greenback was also supported on earlier Reuters news which reported a Japan senior government official said yen’s current levels seem to be too high. Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, told reporters that they would watch how the currency levels would affect a pickup in business activity. He added ‘we will closely watch how this will affect businesses and the economic recovery, which lacks support from domestic demand.’
Although the British pound traded narrowly with a firm undertone in Asia after Thursday’s rally to 1.5296, cable then surged to an intra-day high of 1.5450 as the much stronger-than-expected U.K. GDP data prompted investors to buy sterling aggressively. U.K. Q2 GDP jumped by 1.1% q/q, the strongest growth in four years and much better than the estimate of 0.6% increase, compared to the previous reading of 0.3%. Cross buying in eur/gbp cross pair also supported cable as eur/gbp tumbled from 0.8451 to 0.8318 before rebounding. Later, although cable retreated to 1.5349 in tandem with euro in NY morning, the pound climbed back to 1.5440 before stabilising.
Key economic data to be released next week include :
Japan Export, Import, Trade balance (Japan), Australia PPI, U.S. Chicago Fed Nat Act. Index, New homes change, New home sales on Monday, Japan CSPI, Germany Import price index, Gfk index, U.K. CBI distribution trade, U.S. Consumer confidence, Midwest manufacturing on Tuesday, Australia CPI, Germany CPI prelim, HICP prelim, U.S. Durable goods, ex. Defense, ex. Transport, Fed releases Beige book on Wednesday, New Zealand RBNZ rate decision, Trade balance (nzd), Imports, Exports, Japan Retail sales, Germany Retail sales, Unemployment change, Unemployment rate, EU Economic sentiment, Consumer Confidence, U.S. Jobless claims, Canada PPI on Thursday, Japan Manufacturing PMI, Household spending, National CPI, Tokyo CPI, National CPI, Unemployment rate, Industrial prod’n, Construction orders, Housing starts, EU HICP flash Y/Y, Unemployment rate, Swiss KOF indicator, U.S. Personal consumption, PCE core, GDP annualised, GDP deflator, Chicago PMI, U. Michigan survey Final, Canada GDP on Friday.
