After Spain’s €100 billion bank aid package was formally agreed upon on Friday, investors quickly dumped risk-correlated assets as it became clear many of the country’s struggling regions would require financial assistance from the federal government. This has stoked concerns that Spain will need an international bailout ala Greece. As noted previously, we believe that the €100 billion package will be the first of many bailouts for Spain. Meanwhile, as Greece is running out of money, again, the European Union Commission has weighed in on the matter. “The commission is confidence that the decision on the next disbursement will be taken in the near future,” a spokesman said earlier today. However, this decision is not expected to occur until September, meaning that Greece will need to access short-term loans via money markets to bridge funding the next several weeks.
The joint concerns over Greece and Spain have destroyed market sentiment this morning, sending peripheral European yields through the proverbial roof. The Italian 2-year note yield has jumped to 4.586% (+41.5-bps) while the Spanish 2-year note yield has ballooned to 6.434% (+81.1-bps). Similarly, the Italian 10-year note yield has surged to 6.325% (+19.1-bps) while the Spanish 10-year note yield has risen to 7.398% (+21.4-bps), but not before touching 7.565% earlier; higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:48 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.11%(+0.30% past 5-days)
There’s little by way of data due in the coming hours, with no top of the docket data expected on Monday. However, of note, the preliminary EUR Euro-zone Consumer Confidence report for July is due at 10:00 EDT / 14:00 GMT, which is expected to show a drop towards the index’s lowest level since February. While the release will not materially impact trading, a weak print will not help the underlying bearish tone to the trading day thus far.
EURUSD: The pair traded into the 1.20xx figure earlier before rebounding back towards its opening levels today, but that means little in terms of the broader trend. In fact, the relative strength of the Euro compared to the commodity currencies was to be expected given the decoupling the past few weeks. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875. Near-term resistance comes in at 1.2255/65 and 1.2330/50. Above that, interest lies 1.2400, and the crucial 1.2440/80 zone (Symmetrical Triangle support). Support comes in at 1.2115/20 (Bollinger Band) and 1.2080/85 (new July lows). We expect buying interest around the psychologically significant 1.2000 figure.
USDJPY: Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there; but the daily close below 78.60 suggests that the pair could trade as low as 78.15/25 before buying interest returns. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.
GBPUSD: Little follow through on the breakout and failure to rise above the 200-DMA has prompted a reversal in the pair, which has sliced through its 10- and 20-DMAs will ease to the downside. Similarly, a steep rising trendline has now been broken, pointing to further losses. Near-term resistance comes in at 1.5570/85 (10-DMA, 20-DMA) and 1.5600/15 (50-DMA). Near-term support comes in at 1.5460/65 then 1.5390/1.5405 (monthly low, Bollinger Band).
AUDUSD: The pair is respecting an ascending channel off of the June 20 and July 5 highs, hitting resistance on Thursday/Friday leading to the sell-off today. The AUDUSD has hit interim support at 1.0270/80 (10-DMA, 200-DMA). A close below this confluence signals further losses to the 20-DMA and TL support (June 1 and July 12 lows) at 1.0225/35. Considering the strength of the Australian Dollar generally speaking, there is some ‘catch up’ warranted and a move to the downside could occur swiftly, as it has thus far on Monday.
--- Written by Christopher Vecchio, Currency Analyst
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