Forex Market Update: EUR Rally Stalls Above 1.30 For A Second Time

Watch Fed chief Bernanke's testimony this evening

MAJOR HEADLINES - PREVIOUS SESSION

• US Jun. Housing Starts out at -5.0% m/m vs. -2.7% expected and revised -14.9% prior
• Us Jun. Building Permits out at +2.1% m/m vs. +0.2% expected and -5.9% prior
• CA BOC Raises Rates 0.25% to 0.75%, as expected
• US Weekly ABC Consumer Confidence out at -45 vs. -44 expected and -44 prior
• AU May Westpac Leading Index out at +0.2% m/m vs. flat expected
• NZ Jun. Credit Card Spending out at +1.0% m/m, +4.5% y/y vs. 2.0%/3.4% prior resp.

THEMES TO WATCH - UPCOMING SESSION

• Swiss M3 Money Supply (0700)
• UK BOE Minutes (0830)
• US Mortgage Applications (1100)
• CA Wholesale Sales (1230)

Market Comments

EUR early attempt to rally was beaten back last night with a high of 1.3029 the best it could do.  This, despite strong demand at the Greek, Irish and Spanish auctions (though Hungary's was a disappointment). The pair slipped back through 1.29 on profit-taking and short-term stops from momentum traders, with disappointing results from Goldman Sachs the major catalyst along with another weak set of US housing data.  Housing starts fell 5.0% m/m in June, mostly concentrated in the volatile multi-family segment with single-family starts down 0.7% m/m. Single-family building permits also fell 3.0% m/m though the broader index posted above-forecast 2.1% m/m gains. Yet, despite all these negative inputs, Wall St again put in a late spurt to close higher and risk currencies ended the session on the upswing.

The Bank of Canada hiked rates as expected but was more cautious in its statement going forward, suggesting further rate moves would be weighed carefully. They also cut growth forecasts for 2010 back to 3.5% from 3.7% and for 2011 back to 2.9% from 3.1%. The CAD strengthened on the back of the hike, even though it was widely expected, with rising oil prices lending additional support. GBP remained subdued as the public finances showed a higher borrowing requirement than expected.

There were rumours circulating that the Fed might cut the interest rate it pays on bank reserves in order to promote lending, one of the catalysts for the late equity rally, and maybe Fed chief Bernanke will mention./expand on this theme in his semi-annual Humphrey Hawkins testimony this evening. Certainly the markets appear to be starting to price in some move towards additional quantitative easing and the chairman's testimony and the market's reaction will be key, especially considering where we are trading in the greenback.

Ahead of the EU bank stress test results on Friday, the Spanish finance minister comments that all 27 Spanish banks had passed, while French newspaper Le Monde assured that all French banks had passed as well. Hope the results match all this (!), though we feel that a large part of the positives have been already priced into risk and the EUR.

It was another quiet day on the data front for Asia again with BOJ minutes showing members agreeing that the new loan program designed to spur economic growth in selected areas would help price stability, if effective, and not hurt policy. There was some caution on the outlook for the second half of the year once stimulus is removed.  The only other data release was Australia Westpac Leading Index which nudged up 0.2% m/m but indicated a slowing annualized growth rate for the second successive month.

Heading into Europe, BOE minutes are the only attraction with markets looking for their more recent take on the stubbornly-high inflation levels. North America only has Canadian wholesale sales on tap, not forgetting Bernanke's performance before the Senate Banking panel.