Mounting Problems For EU Summit

As we approach the start of the EU Summit tomorrow, traders’ belief in a successful outcome at this meeting is gradually waning, resulting in increased downside risks for the Euro. The continued opposition to common Euro-area bonds by the German Chancellor has shifted focus on her meeting with the French President later today. Following yesterday’s rising yields at the Spanish and Italian bond auctions, today’s sale of €9 billion in short term debt by Italy is likely to garner increased market attention. Yesterday, Egan-Jones downgraded Germany rating to ‘A+’ from ‘AA-’, with a negative outlook. At home, data just out indicated that loans for house purchases declined for May.

Pound Sterling – UK Markets

In yesterday’s trading session, mounting concerns over the European debt crisis continued to favour Sterling against the Euro. However, the Pound was volatile against the US Dollar. The BoE Governor, Mervyn King’s yesterday warned that UK’s economic outlook had deteriorated, and opined that the QE programme will have a greater impact than an interest rate cut. Additionally, data indicating higher than expected government borrowing for May has cast doubts on the nation’s deficit reduction plan. Sterling is holding well against both the Euro and the US Dollar this morning, despite data released this morning that indicates that BBA loans for house purchases in the UK dropped for May. On the macro front, markets await the release of CBI reported sales data for June for cues on the British retail sector. The final reading of first quarter GDP due tomorrow is also expected to garner increased attention against the backdrop of a dismal assessment of the economy by the central bank.

US Dollar – US Markets

The US Dollar traded with an upward bias against the Euro yesterday amid subdued sentiment surrounding the upcoming EU summit and soaring bond yields in Spain and Italy. The domestic economic data continued to signal weakness as consumer confidence for June slipped to the lowest level since January 2012 while the manufacturing activity in the Richmond region showed an unexpected decline for the same period. However, a better-than-expected monthly rise in the S&P/Case Shiller 20-city composite index for April countered calls for a QE3. In today’s trading session, the greenback is trading almost flat against the major currencies. In a noteworthy comment, the Dallas Fed President, Richard Fisher, opined that the expansion of “Operation Twist” would only have a “very minor effect” on the economy with the costs exceeding the benefits. Hogging the spotlight for the session is durable goods orders data which is expected to indicate a rebound for May. Additionally, pending home sales report later today is likely to be largely positive, indicating a recovery in the housing market.

Euro – European Markets

Yesterday’s session witnessed losses in the Euro against the majors as doubts that concrete actions would be taken at the forthcoming EU Summit was reflected in rising yields at the Italian and Spanish bond auctions. To add to the woes, the German Chancellor, Angela Merkel, firmly ruled out the issuance of Eurobonds and Egan Jones lowered German credit rating to “A+” from “AA-”, with a negative outlook. Meanwhile, the top four EU officials including ECB President, Mario Draghi, presented a draft suggesting that the EU should have the power to re-frame national budgets of those member states which fail to adhere to debt and deficit rules. The Euro is trading flat against its major counterparts this morning as markets await the Merkel-Hollande meeting later today for cues over measures that might be undertaken at the EU summit. Additionally, outcome of the Italian debt auction is also set to gather eyeballs. On the macro front, data due today is expected to indicate that German inflation eased for June, thereby boosting hopes that the ECB might express its willingness to play a bigger role in tackling the region’s crisis in its monetary policy meeting next week.

Other Currencies – Highlights

The Kiwi Dollar has weakened against the US Dollar in today’s trading session after data released earlier today indicated that trade surplus in New Zealand narrowed to NZ$301 million for May, impacted by lower commodity prices. Moreover, the Reserve Bank of New Zealand Governor, Alan Bollard, cautioned that the nation’s economic prospects would be deeply affected by developments in global funding markets and the pace of reconstruction in Christchurch. Developments in the Eurozone ahead of the much awaited EU summit and another round of bond auctions in Italy are likely to set the risk tone for today. Additionally, business confidence and housing starts data scheduled for release tomorrow, coupled with key Chinese economic data during the course of the week, is likely to be crucial for the movement in the Kiwi Dollar against the majors.