Calmer Markets, No Resolution

The global capital markets are calmer today, but there has been no resolution of key outstanding issues.  There is still no agreement over the configuration of a new Greek government.  The full extent of Spain's banking needs are still not known and there is speculation that a full-blown assistance package is needed.  Peripheral bond yields are somewhat lower today, but the underlying pressure remains the ECB reluctance to act (to buy Spanish and Italian bonds) has spurred reports that Italy may press for a semi-automatic mechanism to force its hand.  

After yesterday's potential key reversal in the Euro and Swiss franc, there was no follow through selling, which would seem to mitigate significance of that price action.  Some times the rejection of a technical signal is noteworthy.  However, the minor gains recorded in Asia and Europe today have left the intra-day momentum indicators a bit stretched for the start of the North American session.  Nearby resistance for the euro is seen in front of $1.2660.  Support for the dollar against the Swiss franc is seen near CHF0.9500.

 

The UK reported softer than expected consumer prices and this can only fan expectations of renewed asset purchases as early as next month.  At 2.8%, the UK CPI is at its mildest pace since late 2009.  The market had expected an unchanged 3% pace.  Sterling initially spiked lower toward $1.5615 but quickly recovered completely and resistance is now seen near $1.5700.  

Last week, the UK Treasury and the BOE indicated new measures to improve credit conditions and King suggested that gilt purchases could resume.  The fact that this was announced a week after the BOE's MPC meeting did nothing (undermining the significance of the minutes to be released tomorrow) remains a bit mysterious.   

At the same time, it says something about the independence of central banks.  Before the crisis, an independent central bank was seen necessary to avoid the politicization of monetary policy.  Yet, throughout the crisis, it has become necessary for governments and central bankers to work together.  Perhaps independence of central banks is one of the casualties of the crisis.  

Germany reported a dismal ZEW survey.  The expectations component slumped to -16.9 from 10.8.  The market had anticipated some erosion but only to 4.0.  The current assessment remained more solid at 33.2, down from 44.1, though below the 39.8 consensus.  The market reaction was minor as corrective/consolidative forces dominate. 

Spanish, Greek and EFSF auctions went off with out a hitch.  Lower yields were seen in Greece and the EFSF.  The higher yields seen in Spain were not surprising and did not derail the mild recovery in the Spanish bond market where 10-year yields are off around 7 bp at pixel time.  

The Australian dollar remains firm.  It has now taken out the previous day's high for the fifth consecutive session.  The RBA minutes may have helped as they did not suggest a rate cut next month.  This does not mean that its easing cycle is complete.  However, short-term trend followers and momentum traders are being squeezed to cover shorts, while the still relatively attractive yield and attraction by reserve managers (recently the Bundesbank became the latest central bank to indicate it was considering add Australian dollars to reserves).  

At about $1.0130, the Aussie has met an important retracement objective of the roughly 8.5% decline in May.  The next target is seen near $1.0260.  Support is now seen near parity. 

The Canadian dollar also posted a potential key reversal yesterday.  There has been no follow through selling of the Loonie and key for the dollar is seen near CAD1.02, the neck line of a potential head and shoulders pattern.  Retail sales and CPI are due out in the second half of the week.  A soft CPI reading may encourage participants to scale back expectations of a BOC rate cut any time soon.