Euro dominates matters in a quiet session

In what turned out to be a predictably quiet holiday session in New York, headlines out of Europe were the main fodder for markets today.

The greenback has found its footing, but the dollar index keeps running into resistance at 75.00. After reaching a high of 1.4330 earlier this morning, EURUSD is currently hovering around 1.4260/70 and has been stuck in a tight range since the US open.

US markets are closed for Memorial Day, but European stock closed today flat to neutral, with investors keeping out of the way in thin market volume.

In the absence of too much action in the markets it was down to Italian Prime Minister Berlusconi to hit the headlines. Overnight he had said that President Obama supported a strong euro (usually the US government stick to a strong dollar policy!), then there was a large Italian bond auction that saw demand remain high but yields rising.

To top it off the final count of some key local Italian elections went against Berlusconi’s centre-right coalition government. The elections in Naples and Milan were considered litmus tests of support for the beleaguered Italian leader who is also on trial for abuse of power and having relations with an underage woman.

Previously Berlusconi had said that losing Milan, his home city, was unthinkable, but now he has to face the unthinkable. It is not yet known what he plans to do, but political instability in one of Europe’s most highly indebted nations is not going to help boost sentiment towards the Eurozone. The IMF came out today and said that Italy wasn’t in immediate financial danger, although it noted that a lot of work needs to be done to reduce public debt levels.

In Canada, GDP data was a touch below expectations for the first quarter. It came in at a respectable 3.9 per cent on an annual basis, below the 4 per cent expected but higher than the 3.1 per cent rate in Q4 2010. This weighed on the Cad as it makes it unlikely that the BOC will hike rates tomorrow, the market expects no change at 1 per cent.

The details of the report were mixed. Growth was driven by business investment and manufacturing although the retail sector actually moderated. Consumer spending was flat in Q1, the first time it had not registered growth in 2 years. This suggests that growth isn’t being driven by domestic demand and may falter later this year. Added to this, the Conservative government led by Stephen Harper has pledged to end the two year economic stimulus programme and eliminate a record deficit in the coming quarters, which could also weigh on growth.

Elsewhere, risky assets have come under some pressure as headlines out of Greece and the Eurozone weighed on sentiment. Oil is slightly lower as is copper and other industrial metals. There is a risk that these headlines will be digested by the markets tomorrow after the US and UK holiday, which could see a continuation of weakness in the markets.

Watch out for China’s leading economic index tomorrow released ahead of Wednesday’s manufacturing PMI for May, which is expected to moderate to 51.6 versus 52.9 in April. The Chinese renminbi reached a fresh high against the dollar yesterday; all eyes will be on the Yuan to see if this is the start of a more prolonged period of adjustment in the Chinese currency. However, we think this is part of Beijing’s softly, softly approach to allowing it one day to float freely.

Source: Forex.com

30.05.2011