While headlines focus on the EU, the real story is the JPY

The USD was stronger across all of the G10 today with exception to the JPY as risk deteriorated early on and could not recover later in the day. Sentiment started off in the doldrums when Spain formally requested aid for their troubled banking sector and the negative headlines just kept on coming. Fitch downgraded Cyprus to junk status, with a negative outlook and then news hit that the Troika’s decision making process in Greece may take longer than anticipated. Added to this, later in the day Cyprus also went on to request aid from the EFSF/ESM (or whatever other bailout mechanism is rumored to be out there) to contain the spillover from Greece and then the newly appointed Greek Finance Minister Rapanos resigned due to health reasons. Keep in mind this all comes ahead of the EU Summit later in the week and German Chancellor Merkel was on the wires trying to downplay investor’s expectations. Not surprisingly, this saw the Euro remain weak on the day and European bourses finish deep in the red – DAX1: -2.09%, CAC1: -2.24%, IBEX1: -3.67% & FTSE MIB1: -4.02%.

On the other hand, somewhat more upbeat economic data here in the States flew under the radar today – U.S. May New Home Sales rose to 369K vs. consensus 347K and 343K in the month prior (highest reading in over 2 years) and the June Dallas Fed Manufacturing survey came in at 5.8 vs. expected -2.0. However, this was still not enough to sway investor attention away from the troubled Eurozone.

In FX, we saw emerging and commodity currencies under-perform on the day, with the ZAR and NOK leading the way. This should be expected as risk faltered broadly throughout the markets – The Dow Jones Industrial Average1 finished lower by about -1.09%, S&P5001 fell by around -1.60% and U.S. 10-year yield was lower by -4.39% on the day. Precious metals actually partook in the flight-to-safety festivities as Gold rallied +0.80% and Silver was higher by about +2.35%, but crude oil still remains lower today, as US Oil1 fell by around -0.70%. The mixed performance suggests something is aloof, and while precious metals have had a tendency to lead the market over the past few weeks, it has all the makings of a ‘bull’ trap and we remain cautious. Furthermore, with the dollar remaining strong and the S&P500 poised for further declines – See Friday’s CHART TO WATCH, it should prove difficult to see a significant advance in the precious metals arena. Perhaps the real story had little to do with EU headlines after all, as the real mover today was the Japanese Yen (strengthened significantly today on the back of risk-aversion flows). As a result, USD/JPY broke back below the psychological 80.00 level and the prior downtrend looks poised to resume – See FX TECH LAB from June 14th for more on this, as a further continuation lower is anticipated.

On the data front for the upcoming Asia/Pacific session is the release of Japan May Corporate Service Prices, Japan June Small Business Confidence and China’s May Leading Economic Index.

Source: Forex.com

25.06.2012