Portugal and Egypt Create Market Unease While Risk Pairs Sell Off

Kevin Jin

THE TAKEAWAY: US ADP Employment Change (JUN): +188K actual versus +160K expected, from +134K prior (revised down from +135K) > USDJPY falls back below ¥100.00

Portuguese and Egyptian political instability are adding to risk-off sentiments today. Yesterday afternoon, Portuguese Foreign Minister Paulo Portas resigned, which investors took to signal that Portugal may need to seek additional aid and may require a restructuring of government debt. Portuguese bond yields spiked after this news and the spread between 2YR Portuguese and German government bond yields is higher by +132bps (+30.82%) to 428.2bps at the time of writing. In Egypt, there are widespread protests calling for President Mohamed Mursi to resign due to public discontent towards Mursi’s overly-Islamic policies. The Egyptian military demanded that Mursi either quell the protestors or resign; Mursi has since stated his intention to stay in office despite military demands. These protests have impacted crude oil prices the most, since Egypt controls the Suez Canal—an important shipping route. The Brent-WTI spread is now at $4.44 (at the time of writing), the tightest level since early 2011.

US equity markets are closing early today so liquidity is thinner while the implied market volatility, measured by the CBOE Volatility Index (VIX), is nonetheless higher by +1.40% to 16.67 at the time of writing. The VIX started the day much higher at 17.32 but has since declined as the shortened equity trading day draws to a close. Global equity markets are mostly negative today although the S&P 500 is now positive after trading negative for most of the day: S&P +0.19%; Euro Stoxx -1.25%; FTSE -1.17%: Nikkei -0.31%; Hang Seng -2.48% at the time of writing. Regarding commodities, crude oil is higher on the aforementioned supply concerns while base metals are mixed: WTI +1.80%; Brent +1.76%; LME Copper -0.99%; COMEX Copper +1.10%; Shanghai Copper +0.60% at the time of writing.

Bond markets are overall mixed again with North America trading flat while Eurozone bond investors noticeably favor safe haven countries such as Germany while selling off Portuguese and Greek government bonds. Lastly, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) falls -27 (-0.24%) to 10860 at the time of writing. The US had several noteworthy data releases today which show improving labor conditions, described here and here.

AUDUSD 15-minute Chart: July 3, 2013

Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_4.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off
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Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_4.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off

Charts Created using Marketscopeprepared by Kevin Jin

The AUDUSD is trading lower today by -57 pips (-0.62%) to $0.9087 at the time of writing. The pair tried to break up to .9200 during the Asian session but was rejected. The pair further fell after RBA Governor Glenn Stevens remarked that the RBA “deliberated for a very long time” during this week’s meeting about whether to further cut rates. This strongly dovish commentary from Stevens signaled to traders that the pair may fall further, although the AUDUSD seems to be holding the monthly S1 pivot of .9048 for now.

GBPUSD 15-minute Chart: July 3, 2013

Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_3.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off
View photos
Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_3.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off

Charts Created using Marketscopeprepared by Kevin Jin

The GBPUSD traded with very little volatility during the Asian session but volatility picked up when Britain reported impressive PMI numbers at 08:30 GMT (04:30 EDT on chart above). The PMI Services survey showed an increase to 56.9, much higher than the Bloomberg News survey expected 54.5. This initiated a rally in the cable that continued for essentially the majority of London trading. The pair is trading up to the $1.5300 resistance level at the time of writing.

EURUSD 15-minute Chart: July 3, 2013

Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_2.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off
View photos
Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_2.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off

Charts Created using Marketscopeprepared by Kevin Jin

The EURUSD is higher on the day, trading slightly above the psychologically important $1.3000 level at the time of writing. The pair stayed below 1.3000 for most of the trading day until a strong rally during London Close, which pushed the EURUSD above 1.3000.

USDJPY 15-minute Chart: July 3, 2013

Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_1.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off
View photos
Portugal_and_Egypt_Create_Market_Unease_While_Risk_Pairs_Sell_Off_body_Picture_1.png, Portugal and Egypt Create Market Unease While Risk Pairs Sell Off

Charts Created using Marketscopeprepared by Kevin Jin

The USDJPY remains as one of the most exciting pairs to watch. A heavy selloff in the USDJPY during London Open pushed the pair below the important ¥100.00 level with relatively little resistance. Now following London Close, the pair has traded beyond 100.00 yet again but this time, with relatively low volatility. It will be interesting to see where the pair finishes at New York Close today.

--- Written by Kevin Jin, DailyFX Research

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