Dollar Comes Back Bid

Currency in Crisis

The dollar has begun the new week bid.   Short-term momentum traders were leaning the wrong way and why not, the euro gained each day last week and one global bank came out with a report over the weekend calling for additional euro gains. 

Key support for the euro is seen near $1.3070-80 and a convincing break is needed to boost confidence that a high is in place.   Sterling, which often leads the euro, is softer, but is showing some resilience.  Key support is seen near $1.56.  With short-term technical readings stretched, the risk is for a more stable tone in the foreign currencies in the North American morning. 

The news stream has not been so good as the market awaits the first EU heads of state summit of the year.  Greece and the German proposal is threatening to steal the show, but the ESM funding at 500 bln euros (to be reviewed in March) to start later this year will likely be approved and further progress on the agreement to have debt brakes enshrined in national law. 

French developments are also impinging n the news stream.   Sarkozy, in a campaign of this career, indicated intent to unilaterally impose a financial transaction tax as he previously promised.  French financials have not taken this well and are the weakest sector of the CAC, off about 4% near pixel time, compared with a 1% overall market decline. 

The Italian bond auction that saw a mixed reception, kicks off this week's relatively large supply of sovereign bonds.   European bond markets are under pressure, led by the continued sell-off

Spain confirmed the central bank's figures (on Jan 23) that the economy contracted 0.3% in Q4.  Recall that Fitch's assessment in the downgrade was deteriorating macro economic outlook and doubts over it meeting its deficit target this year.   Meanwhile, one impact of government austerity is that the regional government of Catalonia has indicated that it will no longer support Spanair--Spain's fourth largest airline, leading to its collapse.   The industry arguably suffers from excess capacity and some of Spanair's competitors are doing better today. 

There was some disappointment that China did not cut reserve requirements and Asian shares were lower, including the Shanghai Composite which dropped almost 1.5%.   This may have weighed on the Australian dollar.  It reached a 3-month high last week just shy of $1.07 and fell to about $1.0530 today.  some observers will cite Fitch cutting the the outlook of four local banks to negative.  The Australian dollar has been among the strongest G10 currency in recent weeks, despite the fact that the RBA is clearly in an easing mode and the third cut in as many meetings is expected on February 7th.   Key support for the Australian dollar is seen near $1.04.