10:00 GMT- May 11 (global-view.com) The second day of the European bailout program is seeing skepticism about the plan seep into the consciousness of the markets. In programs of this type, it is often said that the devil is in the details, and there are growing worries in Germany that it is might wind up being stuck footing the bill for the bulk of the program. Chancellor Merkel no longer has control of the upper house of the Parliament and cannot be assured that she can get opposition party approval for the plan. Furthermore it has gotten out that the Bundesbank had opposed allowing the ECB purchase the sovereign debt of Eurozone members. In short, the deal is starting to fray around the edges.
Since these are spending bills they will have to be approved by sixteen separate legislatures.
From a trading perspective, the best barometers of the state of the markets are equity and forex prices. At the moment European equity prices and the EUR are weak. This suggests waning confidence in Europe. Previously, individual currencies could have been devalued to ease market pressures, but Europe is now stuck in the Euro straightjacket. This market has to be played one day at a time.
In the U.K. struggles to form some sort of coalition government continue. In any case, a weak government will emerge from all there discussions. There is already talk of a new election before the year is out.
The EURUSD is down and the GBPUSD is off, while the EURGBP is weaker. All markets are keeping a sharp eye on the short squeeze in European sovereign debt and on the threat of forex intervention..
In the GBP, post-election uncertainty has the GBP in play. Our bias for the EURUSD and GBPUSD has turned mixed.
The EURCHF is sharpy lower. SNB intervention tactics have changed. We will have to see what happens next.
The USDJPY pair is down and the EURJPY cross is sharply weaker. Rating agencies warn that Japan's public finances are a worry. Some note that virtually all JGB bonds are owned by the citizens of Japan. The Hatoyama government wants a lower exchange rate and is pressuring the BOJ to promote growth. Some traders focus intently on the Japan vs. U.S. 2-yr note spread (only the U.S. 2-yr moves much).
The risk trade has been on and off in commodities and the commodity currencies (CAD, AUD and NZD). Today the commodity currencies are mixed to lower. After the RBA raised its cash rate target to 4.50% (+25bp) last week, it also signaled a policy pause. An onerous mining tax proposed by the government has undermined confidence in the unit. Bank of Canada interest rates are seen being hiked June 1. Monetary officials have little concern about CAD strength. A strong currency eases the pressure on the central bank to tighten policy aggressively. Oil and gold are mixed. We favor the AUD, CAD, gold and oil fundamentally.
Far East equities closed lower. European bourses are down. U.S. equities are weaker. The U.S. 10-yr was last 3.48%, -7 bps. Flight to safety demand is back. Bonds are a counter to risk trades because risk investments must be financed. When the cost of money moves up (higher interest rates), the return and allure of risk trades such as equities falls.
UPCOMING DATA HIGHLIGHTS: In North America, the U.S.will see wholesale inventories and the weekly API inventory data.
See ECONOMIC CALENDAR for a complete list of future forex market events and consensus data estimates. Go to the forex forum for up-to-date market developments and technical trading ideas.
John M. Bland is an author and co-founder and partner of Global-View.com. Prior to Global-View.com, he was a forex trader and a private-label forex analyst for a top Fed watching service in NYC. He has been a corporate forex advisor and also worked in international liability management for a major N.Y. money center bank. John holds an MBA from the University of California at Berkeley and a B.A. in International Economics from that school.
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