Spanish Bank Rescue Spurs Rally in Risk, But Many Questions Remain

GFT Forex

Top Stories

  • EU 100B Bailout of Spanish banks spurs short covering on open
  • Man questions remain about the details of the deal
  • Nikkei up 1.96% Europe up 2.36%
  • Oil at $85/bbl
  • Gold at $1596/oz.

Overnight Eco

  • JPY BSI Large Manufacutring (QoQ) (2Q) -5.7 vs. -2.4
  • JPY Consumer Confidence (May) 40.7 vs. 39.9
  • NZD Manufacturing Activity (1Q) -1.8% vs. -0.9%

Event Risk on Tap

  • None

Price Action

  • USD/JPY quiet at 79.50
  • AUD/USD stalls ahead of parity and back to .9965
  • GBP/USD capped at 1.5500
  • EUR/USD gap open is capped at 1.2650

Euro gapped higher on the first trading day of the week in the wake of 100B rescue deal for Spanish banks negotiated over the week-end. The pair raced  to a high of 1.2667 in early Asian trade before running into resistance and is so often the case of with weekend gaps, the flows reversed in Europe with EUR/USD dipping back below 1.2600 as profit taking kicked in.

The Spanish bank rescue deal provided  much needed boost for risk FX, but it left many questions open as details of the package were scarce. As many analysts have pointed out it left the issues of interest rates and source of funding still open, but most importantly the deal did not clarify if the rescue package would be senior to the Spanish sovereign which in turn could force Spain out of the credit markets.

In one very important aspect the Spanish bank rescue deal differed markedly from other European bailout packages. First and foremost it was not made a direct obligation of the sovereign and came with no preconditions on budget austerity that were part and parcel of earlier deals with Greece, Portugal and Ireland. Although even this point remains murky with El Pais reporting that if Spain deviates from the agreed stability pact program the bailout funds will stop.

The lack of details in the deal, most of which will not be revealed until June 21st, will likely keep investor enthusiasm at bay as markets try ascertain the true impact of the bailout package. With EUR/USD so grossly oversold the meteoric short covering rally was not at all surprising, but having more than 150 points higher since the close on Friday, the pair may now pause and give back some its early gains as initial enthusiasm gives way to more skeptical analysis.  

With no major economic data on the docket in either Europe or North America, the macro headlines from Madrid will continue to dominate trade for the rest of the day. If equity markets cannot sustain the early gains risk FX could see further erosion of the rally and a possible fill of the gap from the Sunday night open before prices stabilize once again. 

FX Upcoming

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