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| Markets Rebound with NZD/USD Rallying Posted: 24 May 2011 05:35 AM PDT
Equity markets have recovered tepidly from yesterday's global sell-off while the euro has come off of its low and the kiwi has rallied. Global bourses came out of the basement following yesterday's sharp move into the red. The Nikkei is up slightly 0.17% while the FTSE is trading higher by 0.50%. US stock futures are also trading up. The euro reached as high as 1.4115 before pulling back after the Greek political opposition declared their obstruction to an increase in austerity measures. However, the opposition party did note they were open to an increase in state asset sales. An uptick in market sentiment could help erase some of yesterday's losses. EUR/USD resistance is seen at 1.4120 followed by 1.4185 and 1.4240 from the trend line off of the early May high. Support comes in at 1.4030. The European debt crisis has taken a firm grip on the euro's trajectory. Today comments from ECB Governing Council member Chrisitan Noyer highlight the opposition to a Greek debt restructuring as Noyer compared the idea of restructuring to, "a horror story." European data this morning was weaker than expected as industrial orders for the month of March fell -1.8% on consensus expectations for a decline of only -1.2%. Recently Spain's name has been included in the same conversations as the peripheral nations due to this past weekend's elections. Today Spain successfully auctioned off new bills at somewhat lower yields than at previous level. This may have helped ease pressure on the euro. However the peripheral bonds of Greece, Portugal and Ireland continue to trade at substantially higher yields. The kiwi was trading higher today after New Zealand inflation expectations rose 3.0% from the Q1 reading of 2.6%. Yesterday the NZD/USD fell as low as 0.7857, a level that coincides with the upper line of a falling wedge pattern. Today after the inflation report the pair broke above the 0.8000 level. The next resistance level for the pair rests at the May high of 0.8120. Read more forex trading news on our forex blog. |
| Posted: 24 May 2011 04:19 AM PDT
There are two major factors driving the value of the euro; interest rate differentials and the European debt crisis. At this stage, only the debt crisis is having an impact on forex trading. Since January gains in the euro have largely been driven by interest rate differentials between Europe and the US with Europe in the process of moving European rates higher. At the same time the US was in the process of easing monetary policy via its second quantitative easing program. As markets increased expectations of higher ECB rates the value of the euro increased accordingly. With US monetary policy forecasted to remain in a state of providing the market with high levels of liquidity the EUR/USD reached a 16-month high. After the ECB signaled it will not raise interest rates as quickly as markets expected the EUR/USD came off of this high. One way to view the different interest rate differentials is to track the yield difference between the 2-year German Bund and the 2-year US Treasury. At one point the Bund was trading at a difference of 130 bps. As of this morning the difference has shrunk to 118 bps. This data point drives home the previous factor that was supporting the euro since January, interest rate differentials. A new, yet familiar theme is now the leading factor in the movement of the EUR/USD; the European debt crisis. Tensions are building as Greece's sovereign credit rating was cut multiple levels by Fitch. Greece looks to be unable to reach its proposed budget deficit target of 7.5% of GDP. Reportedly Greece only has enough cash on hand to prevent a default until mid-July. This makes it the utmost importance that the indebted nation receives additional funding from previously negotiated agreements with the EU/IMF. Speaking last week, ECB executive board member Jürgen Stark said the ECB would cease to accept Greek bonds as collateral for loans to Greek banks should Greece choose to restructure its sovereign debt. Stark was quoted as saying, "Sovereign-debt restructuring would undermine the eligibility of Greek government bonds." Earlier comments last week from EU officials warned a restructuring would be detrimental to the Greek banking system. The ECB is rumored to have 40-50B euros worth of Greek debentures on its books. Recently Junker proposed a re-profiling of Greek debt that would extend Greek maturities based on a mutually agreed extension. Concurrently Italy and Belgium were hit with a series of ratings downgrades, adding a string of negative sentiment to the euro zone. Elections in Spain have also brought the market's attention back towards one of the larger European economies. The risk for the euro is a failure of EU authorities to contain the Greek debt crisis while avoiding a contagion effect and a downturn in investor sentiment. Such a scenario would bring a sell-off of the euro in forex trading as well as European fixed income instruments. Read more forex trading news on our forex blog. |
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