10:00 GMT- May 25 (global-view.com) Financial markets are very unsettled today. Concern started in the Far East over North Korean worries which were reinforced by liquidity concerns about Europe. The immediate concern in Europe is about the Spanish Savings bank system and its exposure to the housing crash. There has been a lot of talk recently about a lack of liquidity in the European banking system. The failure of several banks in Spain yesterday has unsettled the markets. These worries are have been evident in a flight to safety into U.S. and German 10-yr sovereign debt instruments. There has been chatter as well that the Russian Central Bank might have been diversifying some of its forex reserves out of the EUR today.
Neither the U.S. nor Europe are opposed to a weakening of the EURUSD, but they will be unnerved by panic selling of the EUR. Mainly they do not like disorderly forex markets. What constitutes disorderly markets is very much in the eye of the beholder, but today's price action could meet that test.
The EURUSD is lower and the GBPUSD is down. The EURGBP is soft. Traders have been keeping an eye on the short squeeze in European sovereign debt and on the threat of forex intervention in the EUR.
In the GBP, the U.K. new government is weak. Already news surfaced that the outgoing Labour government left a much larger budget deficit than earlier estimated. A second election may not be far away. Our bias for the EURUSD and GBPUSD remains negative.
The EURCHF is down. SNB intervention tactics have changed, as recently the SNB has taken a strong stand. Flows out of the EUR into the CHF remain an issue for the SNB. The SNB has set a EURCHF floor of 1.4000.
The USDJPY pair is down and the EURJPY cross is lower. Japanese public finances are a worry. however JGB bonds are mostly owned by Japanese. The government wants a lower exchange rate and has warned the markets about the JPY. It also has been pressing 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 commodity currencies (CAD, AUD and NZD). The commodity currencies are weaker. There had been talk of heavy flows out of the commodity currencies back to the JPY. After the RBA recently raised its cash rate target, it also signaled a policy pause. Bank of Canada interest rates are expected to be hiked June 1. Monetary officials are unconcerned about CAD strength. A strong currency eases the pressure on the central bank to tighten. Oil and gold are down. Gold is still favored as as refuge from paper money. We had been favoring AUD, CAD, gold and oil fundamentally, but some doubts are creeping in.
Far East equities closed mixed. European bourses are down. U.S. equities are weaker. The U.S. 10-yr was last 3.08%, -14 bps. 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 Case Shiller index, Conference Board Consumer Confidence Survey, a two-yr note action and API weekly data are slated.
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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