Fundamental Headlines

- Greek Pro-Bailout Parties Gain Amid Euro Collapse Concern – Bloomberg

- Spanish-German Yield Spread Widens to Euro Record on Bank Funds – Bloomberg

- Iran Not Ready for Visit to Suspect Nuclear Site – Reuters

- Gold Poised to Regain Safe-Haven Status – WSJ

- Kenny Urges Ireland to Back EU Treaty – WSJ

European Session Summary

Trading in the Asian and European sessions were marked by notably light volume, which comes as no surprise given major holidays in both Europe and North America. And, when considering the recent correlation between volume and the S&P 500 (-0.956 rolling 5-day as of Thursday), it is even less surprising that demand for riskier assets is up amid the light trading conditions. The commodity currencies have been taking advantage of this ripe environment, with the Australian and New Zealand Dollars leading the majors substantially to start the last week of May.

In part, developments over the weekend out of Greece have provided the fundamental push to spark a move back towards higher yielding currencies and risk-correlated assets. Five separate polls released over the weekend showed that the pro-bailout New Democracy party held a small lead of approximately 0.5 to 5.7 points over the anti-bailout Syriza party. To this end, ND would garner between 25.6 percent and 27.7 percent of the vote, while Syriza would take home between 20.1 percent and 26.0 percent of the vote at the June elections. Providing further fuel to ease concerns, the results from two of the leading polls, MARC and Pulse, showed that ND and PASOK, the other major pro-bailout party, would together win a parliamentary majority in June.

Investors have taken the polls results and run with them, with the AUDUSD and NZDUSD rallying by 0.97 percent and 0.94 percent, respectively, to start the week. The Euro hasn’t responded to the news, however, bringing this rally into question, as it appears investors are now starting to shift their primary concerns to the increasing debt burdens of Italy and Spain.

Taking a look at credit, shorter-term yields are starting to rise rapidly once more, with the Italian and Spanish 2-year notes yielding 3.807 percent and 4.288 percent each, respectively. For the latter, this is the highest yield in 2012 thus far. Funding stress is evident on the longer-end of the yield curve as well, with Italian and Spanish 10-year yields rising by 3.8-basis points and 12.1-bps, respectively, to 5.679 percent and 6.391 percent each. Accordingly, I believe that while the developments out of Greece are positive, they will not ease fears of dwindling deposits in European banks; these increasing yields in Europe’s larger economies (Italy and Spain) will garner more attention ahead of the Greek elections in June.

NZDUSD 5-min Chart: May 28, 2012

Aussie_Kiwi_Rally_Almost_1_Percent_versus_US_Dollar_in_Light_Trading_body_Picture_10.png, Aussie, Kiwi Rally Almost 1 Percent versus US Dollar in Light Trading

Charts Created using Marketscope – Prepared by Christopher Vecchio

The New Zealand Dollar is the top performer today, with the NZDUSD rallying by 0.97 percent. The US Dollar was the worst performer overall, with it paring the lease against the Swiss Franc, to which it lost 0.10 percent to. The Japanese Yen was slightly higher, with the USDJPY depreciating by 0.34 percent, and the EURUSD was barely higher, up 0.18 percent on Monday at the time of writing.

24-Hour Price Action

Aussie_Kiwi_Rally_Almost_1_Percent_versus_US_Dollar_in_Light_Trading_body_Picture_7.png, Aussie, Kiwi Rally Almost 1 Percent versus US Dollar in Light TradingAussie_Kiwi_Rally_Almost_1_Percent_versus_US_Dollar_in_Light_Trading_body_Picture_1.png, Aussie, Kiwi Rally Almost 1 Percent versus US Dollar in Light Trading

Key Levels: 12:30 GMT

Aussie_Kiwi_Rally_Almost_1_Percent_versus_US_Dollar_in_Light_Trading_body_Picture_4.png, Aussie, Kiwi Rally Almost 1 Percent versus US Dollar in Light Trading

Thus far, on Monday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading slightly lower, at 10174.78 at the time this report was written, after opening at 10182.24. The index has traded mostly lower, with the high at 10183.25 and the low at 10148.44.

--- Written by Christopher Vecchio, Currency Analyst

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