Euro at Risk on Soft PMIs, Spanish Bank Audit Results and Bond Sale

Talking Points

• Soft Eurozone PMIs Put Euro, Sentiment-Linked Currencies at Risk
• Euro Area Finance Ministers to Begin Two-Day Summit in Brussels
• Spain Bank Audit to Reveal Price Tag of Recapitalization Scheme
• US Dollar Rose on Haven Inflows Amid Risk Aversion in Asian Trade
• New Zealand Outperformed as 1Q GDP Figures Trumped Forecasts

The preliminary set of June’s Eurozone PMI figures headlines the economic calendar in European hours. The composite gauge is expected to show that the manufacturing and services sector shrank at the fastest pace in there years. German and French PMI readings reinforcing fears that the malaise in the periphery is well on its way to infecting the core of the common currency area. Separately, Eurozone Consumer Confidence is expected to hit a four-month low.

Near-term correlation studies suggest interest rate expectations are increasingly edging out risk appetite trends as the main driver of Euro price action. This hints that signs of deepening recession are likely to weigh on the single currency as ECB easing expectations build. The outcomes may also prove negative for sentiment at large considering a recession in the currency bloc represents the most significant headwind for global output this year, punishing stocks-linked FX including the Australian and New Zealand Dollars.

Against this backdrop, Eurozone Finance Ministers are due to begin a two-day meeting in Brussels. Coming on the heels of the G20 summit earlier this week where EU policymakers faced heavy pressure from global leaders to step up debt crisis containment efforts, the sit-down may begin to see the emergence of preliminary policy ideas. Concrete initiatives are likely to wait until the EU leaders’ summit next week, but traders will nonetheless pay close attention to sideline commentary for early clues.

Spain is also set to release the results of an audit meant to put a firm price tag on recapitalizing the country’s banking sector. A number above or uncomfortably close to €100 billion – the upper limit of the bailout Madrid secured last week – is likely to rekindle sovereign risk jitters. Traders will look to the results of a bond auction offering 2014, 2015 and 2017 paper today to gauge the fallout, with a pick-up in average yields and/or particularly weak bid-to-cover readings likely to compound any data-linked selling pressure facing the Euro and risky assets in general.

The US Dollar rose on the back of haven demand overnight after the Federal Reserve downgraded its expectations for US economic growth, denting the demand outlook for Asian exporters and weighing on regional shares. A disappointing Chinese Manufacturing PMI reading from HSBC reinforced the risk-averse mood, showing the factory sector in the world’s number-two economy shrank at the fastest pace in seven months. The MSCI Asia Pacific regional benchmark stock index fell 0.4 percent. The New Zealand Dollar outperformed after first-quarter GDP figures topped expectations, scattering RBNZ rate cut expectations.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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