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Risk FX Resumes as Spanish Crisis Looms

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • Risk off resumes as far over Spain drive trade
  • UK PPI -0.2% vs. 0.2%
  • Nikkei -2.09% Europe -1.10%
  • Oil at $82/bbl
  • Gold $1571/oz.

Overnight Eco

  • AUD Trade Balance (Australian dollar) (APR) -20B vs. -0.9B
  • AUD Home Loans (APR) 0.2% VS. 0.1%
  • JPY Trade Balance - BOP Basis (Yen) (APR) -5.8b VS. -5.7B
  • JPY Eco Watchers Survey: Current (MAY) 47.2 VS. 51.2
  • EUR German Trade Balance (euros) (APR) 16.1b VS. 13.3b
  • GBP Producer Price Index Input n.s.a. (MoM) (MAY) -0.2%vs. 0.2%

Event Risk on Tap

  • USD Trade Balance (APR) Expected at -$48.5B
  • CAD Housing Starts (MAY) Expected at 218.0K
  • CAD Unemployment Rate (MAY) Expected at 7.3%
  • CAD Net Change in Employment (MAY) Expected at 7.5K

Price Action

  • USD/JPY lower ot 79.20
  • AUD/USD stops tripped at .9850
  • GBP/USD sells off to 1.5450 ahead of CPI
  • EUR/USD pressured below 1.2500 as Spain weighs

Another night of volatility as sharp risk off flows resumed in Asian and early European trade today in the wake of increasing concern over the teetering Spanish banking system. Yesterday the markets initially shrugged off the downgrade of Spain by Fitch in North American trade but sentiment changed rapidly as Asia came on line with EUR/USD experiencing a near vertical free fall in the last trading day of the week. 

Even the Chinese rate cut was viewed negatively by Asian investors as a sign of serious slowdown in Chinese economy rather than a measure of strong stimulus for risk assets. Investors are particularly concerned about tomorrow’s release of key Chinese data which includes Retail Sales and Industrial Production.  

Spain remains the key focus  for the market as its banking sector struggles under the weight of more than 230 Billion dollars of real estate loans that are essentially non-preforming. Analyst estimates are that the country will need as much as $100 Billion in support in order to properly recapitalize the sector. However the country is already experiencing massive groundswell of political resistance to any type of bailout deal. Reports today showed that the most popular Twitter hashtag in Spain yesterday was #stopMerkel.

As we noted last week, “having watched the bailout disaster unfold in Greece, Portugal and Ireland, there is no way that citizens of Italy or Spain will ever accept the same bailout terms when their turn comes.” Therefore, the negotiations for Spanish bailout deal will likely require much lower interest rate terms than those provided to the smaller Southern European economies.  Eurogroup will convene a meeting on Saturday to discuss the terms of any possible bailout deal to Spain and its outcome could determine the direction of the euro next week.

Meanwhile, on the economic front the calendar is relatively quiet today with no release out of the US, although Canada reports its monthly labor data. In UK the PPI dropped markedly lower to -0.2% from 0.2% eyed as decline in oil price send wholesale inflation to its lowest level since 2009. With no major fundamental releases on the docket, trading will be driven by headlines from the EZ and could turn more volatile as the day progresses. If traders see no fast resolution to the Spanish banking crisis selling could accelerate into the weekend with shorts pressing a test of the 1.2400 level in EUR/USD as the day progresses.  

FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:30 8:30 Trade Balance -$48.5B -$51.8B
CAD 12:15 8:15 Housing Starts 218.0K 244.9K
CAD 12:30 8:30 Unemployment Rate 7.3% 7.3%
CAD 12:30 8:30 Net Change in Employment 7.5K 58.2K