Positive News Flow & Optimistic Expectations Support EUR

News and Events:

Greece and the Euro received some much needed support yesterday in the form of private sector's positive contribution to voluntary debt restructuring. France's Finance Minister Lagarde announced that French banks were moving forward with the Sarkozy initiative, with 70% of French banks looking at voluntarily rolling over Greek debt. French banks are estimated to hold nearly 14% of outstanding Greek sovereign debt so the number is not trivial. Obviously the key is the term "voluntary", which French officials state will not trigger a credit event, however, it’s unclear if the rating agencies feel the same way. Risk appetite received a respectable boost on the new lead by US stocks.

EURUSD rally gained momentum at the end of the day, rising 1.53% to 1.4331 while the short squeeze in EURCHF continued pushing the barometer for European credit risk, up to 1.1950. That said, the trading picture in Asia is mixed, with slight bearishness creeping in as Shanghai closed down -0.75% and commodities weaker across the board. Copper (good barometer for global demand) further consolidates in a 3 to 7 range, while Gold after a steep decline in the last two day, has temporarily found buyers at the 00 handle. That said, the recovery in US 2yr yield off the all time low, is something to watch since, if the macro picture clears FX especially will begin to trade back on interest rate direction.

As the optimism around the French bank announcement fades, the 48hr general strike taking place in Greece highlights the imminent risks. In addition, ECB Stark stated in a German newspaper that there is only “Plan A” for Greece, which triggered a selloff in EUR. This comment can be taken a few ways however, what most participants are hearing is that for Greece, there are no EU sponsored alternatives, so they must pass the austerity plan. This week votes on Wednesday and Thursday are still the elephant in the room. The Greek fiscal pan is expected to be submitted to parliament today, with the vote, which could approve the MTFP, expected tomorrow. Then the second vote on legislation due on Thursday.

There is enormous event risk built into these votes, as news flow continues to report migration of dissenters (it was reported that MP from Greece's ruling party, Alexandros Athanasiadis would vote against the MTFP). It is our view, that in the end, when the smoke clears, the two initiatives will pass and the result should be a sizeable short term relief rally. Yet in the midterm, the lack of a comprehensive strategy to the Greek crisis and fears of contagion punctuated by recent threats of rating downgrades to/in Italy, will cap any upside in risk correlated trade moves.

As for today, the events in the UK will take center stage. The GDP final release should be a nonevent as after multiple non revisions should keep yoy unchanged at 1.8%. What might really capture the market’s attention, would be the parliamentary testimony by Governor King and MPC members Tucker, Dale, Posen, and Miles. With inflation still stubbornly above the MPC target rate upper band and comments/minutes suggested that additional QE was being discussed. Traders will be very curious to hear further clarification on policy direction.

And on a final note, US consumer confidence index is expected at 61 cons, 60.8 prior with risk to the downside. Following yesterdays disappointing Personal spending which fell short of expectations and could weigh on GDP there is more proof that the FOMC growth forecasts were overly optimistic and QE might not be far behind.

Today Key Issues:

• 07:30 SEK Retail Sales sa (May)
• 08:30 GBP GDP (Q1 F) q-o-q 0.50% exp
• 09:00 GBP BoE's King, Tucker, Dale, Posen, Miles to speak
• 10:00 GBP BoE's King, Tucker, Bean, Haldane, Bailey to speak
• 11:00 EUR ECB's Trichet Speaks
• 13:00 EUR S&P/CS Composite-20 (Apr)
• 14:00 USD Consumer Confidence (Jun) index 61.0 exp
• 16:00 USD Fed's Fisher Speaks
• 16:45 CAD BoC's Agathe Cote Speaks
• 18:45 EUR ECB's Trichet Speaks

The Risk Today:

EurUsd Yesterday’s 2 big figure rally was impressive however well short of negating any bearish tone. We should be looking to fade the move below the 1.4562 (bearish downtrend ceiling). With traders waiting for a further positive news flow from Greece, resistance should come into play at 1.4358 (23rd June high) then 1.4442 (22nd June High) and 1.4562. Initial support should come into play at 1.4254 (intraday low) then 1.4103 (27th June low) and 1.3970 (23rd June low).

GbpUsd The optimism growing in the risk has failed to migrate over to the cable. This pair is sending nothing but bearish signals (4 days consecutive lower highs) and traders are prepared to sell on rallies. The ease which the cable slipped through 1.6040 (200d MA) support gives scope for a move to 1.5822 (31st Jan low) then 1.5752 (2th Jan low). Should demand finally show-up, watch for 1.6075 (23rd June high) to provide the first area of resistance, minor psychological support at 1.6200 then lots of noise till 1.6232 (22nd June high).

UsdJpy This pair continues to underwhelm us and continues to trade within a constricted range. Even yesterdays directional move to 80.98 /daily cloud base) fails to proved guidance and was quickly rejected. We should remain will within the 79.80 to 80.89 for the foreseeable future. First support is located at 80.00 (psychological level) then 79.70 (8th June low) and 79.57 (5th May lows). On the upside 80.89 (daily cloud base), 81.33 (2nd June high) should keep upside capped.

UsdChf Despite yesterdays heavy buying in EURCHF, we remain bullish on the CHF. The USDCHF continues its bearish onslaught on all support and yesterday corrective rally ended pretty much where it began. Intraday base at 0.8318 should provide minor support today but the broader break of 0.8330 suggests of a test of 0.8300 then 0.8200. Resistance is located at 0.8346 (27th June high), 0.8463 (21st June high) then 0.8551/53 (15ht & 16th June high) and 0.8610 (bearish downtrend ceiling).