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Euro in Focus as EU Stress Test Results Take Center Stage

Euro in Focus as EU Stress Test Results Take Center Stage

2010-07-23 05:06:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Currencies Consolidate in Asia as Traders Brace for EU Stress Tests
• Australian Export Prices Soar Most in Nearly Five Decades in Q2

Critical Levels

euroopen072320101

The Euro and the British Pound consolidated in overnight trade, the former oscillating within 25 pips of the 1.29 figure and the latter tracking sideways in a narrowing band below 1.53 to the US Dollar. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

euroopen072320102

Price action proved muted in Asian trade as currency markets consolidated after the sharp rebound in risk appetite in US hours, with traders opting to take time to digest recent moves ahead of key event risk as the EU prepares to unveil the results of stress tests designed to gauge the soundness of the region’s banking sector (see below).

Australia’s Export Price Index surged 16.1 percent in the second quarter, marking the largest increase on record since 1963. The outcome hints that rising commodity prices may be able to underpin exporters’ profits even as demand from China – the nation’s largest trading partner – falters as Beijing steps up efforts to cool the buoyant economy amid fears of asset bubbles and runaway inflation. On balance, this may prove to keep the mining-dependent economy supported leave scope for renewed monetary tightening, though further evidence is surely needed to draw firm conclusions at this point.

Euro Session: What to Expect

euroopen072320103

The economic calendar may fade out of focus in European hours despite some top-tier scheduled releases on the docket as traders await the release of EU bank stress test results at 12:00 GMT, an outcome that promises to reveal if the region’s top lenders are adequately capitalized to withstand a sovereign default of one (or more) of the common market’s member states. Most interestingly, the result will help determine if the European Central Bank will need to resume long-term repo operations (LTROs), and outcome that would deepen the liquidity pool and weigh on yields, sending the Euro lower.

Preliminary UK Gross Domestic Product figures are set to show the economy picked up momentum in momentum in the second quarter, adding 0.6 percent in the three months through June. The annual growth rate is expected to tick higher to 1.1 percent, the first positive reading in two years and the highest since the first quarter of 2008. However, the operative question at present is how much the economy will slow as the government implements its ambitious “emergency” budget plan – a scheme designed to trim the deficit by a whopping 6.3 percent of GDP in 2014-15. This means the market will likely wait for the more detailed second revision of second-quarter figures that will offer a breakdown of the sources of growth to really size up the result, with traders most concerned with the economy’s ability to avoid renewed recession as fiscal stimulus is withdrawn.

Germany’s IFO Survey of business confidence is expected to show firms’ economic expectations deteriorated for the third consecutive month in July amid concerns about a lurch toward fiscal austerity and rising long-term borrowing costs as governments work to unwind massive public deficits. However, an upside surprise is not out of the question after preliminary PMI figures surprised broadly to the upside for the same period.

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