10:00 GMT- May 26 (global-view.com) Forex markets have been congesting early Wednesday as short term trading seems to be lacking a universal focus. Worry yesterday about the Spanish banking system seems already to have faded, suggesting that those worries did not run very deep or that they were simply a pretext for selling the EUR. Odds are the focus today will be on the equity markets again. They are looking better. In the past few days we have started to keep a keen eye on the U.S. 10-yr yield as a leading indicator of confidence in the markets. Equity prices always seem to follow. The yield on the 10-yr is presently considerably higher than late Tuesday levels at 3.25% +9bps.
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.
The EURUSD is steady and the GBPUSD is also. The EURGBP is steady. 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 steady and the EURJPY cross is unchanged. 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 better. The RBA recently 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 higher. 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 higher. European bourses are up. U.S. equities are up. The U.S. 10-yr was last 3.25%, +9 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 , weekly mortgage statistics, Durable Goods Orders, New Homes sales and weekly energy data are slated. A five-yr note auction is awaited as well.
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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