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Mid-Day Report: Euro Stabilized after Selloff, But Remains Vulnerable Print E-mail
Action Insight Archives | Written by | May 07 12 12:41 GMT

Mid-Day Report: Euro Stabilized after Selloff, But Remains Vulnerable

Euro stabilized from initial post election selloff and recovered back above 1.3 against dollar. There was some support to the common currency from Germany's optimism that "close cooperation" will continue between Chancellor Merkel and French President Hollande. Also, Japanese Finance minister Azumi came out and pledged his ready to act if "speculative movements taking advantage of political factors", after today's slide in EUR/JPY. But after all, sentiments on Euro remains fragile as markets are in deep concern of Eurozone's ability to continue austerity and cure the root of the current debt crisis.

Over the weekend, Socialist Francois Hollande won the French election with 52% vote, making him the first socialist candidate to be elected since 1981. That also ended the famous "Merkozy" leadership in Eurozone which pushed for regional wide austerity as they're still struggling with the on-going debt crisis. Hollande pledged to fight austerity after the election and said that "austerity isn't inevitable" and he vowed to give "European construction a growth dimension. The key is now the lower house of parliament election in five weeks. Should Sarkozy's Union keeps its majority, Hollande will find much difficulties to fight austerity.

Meanwhile, the Greek election is also in focus and the situation is more worrisome. Exit polls indicated that the New Democracy and the Socialist Pasok party, the 2 pro-bailout parties, will have at most a 1 seat majority. And indeed, these two main parties could eventually end up falling short of majority in the 300-seat parliament. Coalition of the Radical Left, an anti-bailout party, would claim second place. It's uncertain what government would be formed after the election and how long could the government last. A pressing concern is the new government's attitude to what's agreed for the bailout. Greece needs to detail some EUR 11.5b in fresh spending cuts for next tranche of bailout payment in June. IMF has said that firstly, troika won't visit Greece before new government is formed and ready to finalize the austerity agreed. Secondly has just reiterated that "if there's no agreement on the new cost-cutting, the payments for Greece will be withheld until there is a satisfactory understanding".

Spain prime minister Rajoy said today that the government will pass a decree on May 11 to restore confidence in Spanish banks. While he didn't give any details, Rajoy emphasized that he doesn't prefer a "bad bank" which was being speculated since last week. This is in contrast to what economic ministry said last week, about the creation of a separate entity to take on toxic assets. Rajoy also opened the door to use "public" as the last resort.

Latest data from SNB showed foreign currency reserves were pretty unchanged at CHF 235.6b in April. The data suggests that SNB didn't increase intervention to defend the EUR/CHF floor of 1.2 but SNB could have used other instruments like forwards, currency swaps or three-month contracts. Swiss CPI dropped more than expected by -1.0% yoy in April as deflation worsened. Unemployment rate was unchanged at 3.1% in April.

Other data released today saw Australia building approvals rose 7.4% mom in March, retail sales rose 0.9% mom in March, NAB business confidence rose to 4 in April. Eurozone Sentix investor confidence dropped further to -24.5 in May. German factory orders rose 2.2% mom in March. Canadian building permits rose more than expected by 4.7% mom in March.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3048; (P) 1.3113 (R1) 1.3146; More.....

EUR/USD recovers after dipping to as low as 1.2954 earlier today. But still, intraday bias remains on the downside with 1.3095 minor resistance intact and deeper decline is expected. As noted before, current development suggests that rebound from 1.2625 is already completed at 1.3486. Further fall should be seen to retest 1.2625 low first. Also, fall from 1.4939 is possibly resuming too and break of 1.2625 will target 61.8% projection of 1.4246 to 1.2625 from 1.3486 at 1.2484 next. Though, above 1.3095 will dampen this immediate bearish view and turn bias neutral first.

In the bigger picture, fall from 1.4939 is treated as a falling leg inside the consolidation pattern that started at 1.6039 (2008 high) and current development suggests that it's not finished yet. Break of 1.2625 would likely pave the way to 1.1875 and below as the consolidation extends. Meanwhile, break of 1.3486 resistance should now indicate that the fall from 1.4939 is finished and will turn near term outlook bullish for 1.5 psychological level to continue the long term consolidation.

EUR/USD 4 Hours Chart

EUR/USD Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:50 JPY BoJ Minutes
01:30 AUD Building Approvals M/M Mar 7.40% 3.20% -7.80% -8.80%
01:30 AUD NAB Business Confidence Apr 4 3
01:30 AUD Retail Sales M/M Mar 0.90% 0.20% 0.20% 0.30%
05:45 CHF Unemployment Rate Apr 3.10% 3.10% 3.10%
07:00 CHF Foreign Currency Reserves (CHF) Apr 235.6B 237.5B
07:15 CHF CPI M/M Apr 0.10% 0.20% 0.60%
07:15 CHF CPI Y/Y Apr -1.00% -0.90% -1.00%
08:30 EUR Eurozone Sentix Investor Confidence May -24.5 -15.3 -14.7
10:00 EUR German Factory Orders M/M Mar 2.20% 0.50% 0.30% 0.60%
12:30 CAD Building Permits M/M Mar 4.70% 2.30% 7.50%

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