Gains may be limited by nervous sentiment

After a massive positive overreaction to the news of the Spanish bailout, risk sentiment turned soon thereafter. AUDUSD was initially sent through parity on the back of the news out of Madrid, before price action reversed and the pair was sent through 0.9900. In fact, price action in the FX market only managed to recover late in the NY session.

The Spanish bailout is currently setup to provide the struggling EU nation with EUR 100 bn to recapitalise its banking sector, which sparked the initial rally. But the market is apparently concerned about the possibly of the bailout triggering a CDS event, despite the International Swaps and Derivatives Association (ISDA) announcing that the proposed rescue is unlikely to trigger a credit event though subordination. Furthermore, unnamed sources were on the wires overnight stating that funds could be channelled through the EFSF to avoid the seniority problem caused by using the ESM. Thus, this may act as support for sentiment in Asia, at least until European bond markets come back online. However, with the Greek election only days away price action may be capped on the upside by uncertainty surrounding the result.

Technically, AUDUSD may find some resistance around 0.9927-0.9940, but a push through this level may see the pair test parity again. On the downside, watch for support around 0.9817 – overnight low – and then another support level lies around 0.9800. Given the lack of positive conviction surrounding the Spanish bailout and with the market entirely focused on Europe, EURUSD may struggle to break through 1.2517 – weekly open - during the Asian session, and any break of this level may easily be retraced by traders in Europe if sentiment falls off a cliff once again. NZDUSD is faring better than both previously mentioned pairs, but it is currently struggling to push much higher than 0.7700.

Source: Forex.com

11.06.2012