Banks not making the Grade

Downbeat manufacturing data across major global economies weighed heavily on high yield currencies yesterday. Moody’s rating downgrade of 15 major global banks, coupled with disappointing German business confidence data released today, does not bode well for the global economy. The deterioration in economic conditions is likely to play on the minds of EU finance ministers at their meeting in Luxembourg. Across the Atlantic, yesterday’s weak economic data justifies the extension of the Fed’s “Operation Twist” until the end of this year. At home, although retail sales numbers were positive yesterday, the possibility of further QE at the next BoE policy meeting cannot be ruled out.

Pound Sterling – UK Markets

A more-than-expected rise in UK retail sales for May and an upbeat CBI industrial trends survey for June yesterday did little to offset the dismal view of the British economy and led the Pound to trade on a weaker footing against the US Dollar. Market speculation has strengthened that the BoE might resort to additional asset purchases at its next monetary policy meeting. Additionally, dismal manufacturing data globally weighed on investor sentiment and dragged high yield assets lower. Nevertheless, the Pound has witnessed marginal gains against the majors in today’s trading session. However, British financial institutions remain vulnerable to shocks emanating from the Eurozone, as evident from Moody’s lowering its credit rating on four major British banks. With no significant economic releases on tap today, markets are likely to stay focused on developments in Europe for more cues on overall risk sentiment. Additionally, a flurry of crucial domestic releases, including the final reading of the first quarter GDP, public finances, current account and Nationwide house prices feature on the calendar for the week ahead and are likely to garner increased market interest.

US Dollar – US Markets

A string of dismal manufacturing data from across the Eurozone and China dampened investor sentiment and boosted demand for the US Dollar as a safe haven asset in yesterday’s trading session. Meanwhile, the poor set of US economic releases yesterday highlighted the prevalent weakness in the economy, substantiating the Fed’s latest stance to extend its “Operation Twist” program and lower its 2012 GDP forecast. Data indicated that the US manufacturing sector grew at its slowest pace in 11 months for June, while the decline in initial jobless claims trailed market expectations. Adding to the woes, another set of data showed a more-than-expected decline in existing home sales for May while the mid-Atlantic factory index slipped to a 10 month low for June. The downbeat data has spurred speculation that the Fed might consider the option of QE3 sooner or later. In today’s trading session, the US Dollar has slid marginally against the Pound, while gaining slghtly against the Euro. With a light economic calendar for the session, the outcome of the EU finance ministers meeting is likely to set the risk tone for today.

Euro – European Markets

Continued contraction in the manufacturing sector across the Eurozone weighed on the Euro against the US Dollar in yesterday’s trading session. Additionally, the Spanish bank audit results, indicating a requirement of up to €62 billion for bank recapitalization, highlighted the dire state of the nation’s banking system. The common currency continues to trade on a weak footing against both Sterling and the US Dollar, as investor sentiment was dented following more than expected decline in German business climate index for June. Moreover, Moody’s downgrading 15 of the world's biggest banks added to the negative sentiment. In a noteworthy development, the Euro area finance ministers, in the meeting held yesterday, have agreed to release the remaining €1 billion of the first tranche under the second bailout to Greece by the end of this month. For the session ahead, investors are likely to track the Euro area finance ministers meeting for further insights on measures undertaken to combat the region’s mounting debt crisis.

Other Currencies – Highlights

The Japanese Yen has declined against its major peers amid speculation that the Bank of Japan (BoJ) might undertake further easing measures after BoJ policymaker, Koji Ishida, indicated that his upbeat view of the Japanese economy does not mean that the central bank would not take any further easing measures in the near term. Prospects of further easing measures remain elevated as BoJ Governor, Masaaki Shirakawa, earlier this week opined that the central bank would continue to tackle deflation pressures with its asset buying program. Moreover, yesterday’s data indicating a further decline in Japanese machine tool orders, coupled with today’s weak supermarket sales for May, presented a dismal view of the economy. However, losses in the Yen remain capped on speculation that Japanese exporters would repatriate their overseas earnings before the end of the current quarter. Meanwhile manufacturing, inflation and employment data, scheduled for release next week, are expected to provide further direction for the Yen against the majors.