The Euro was broadly lower last week on holiday-thinned volumes, with the EUR/USD carving out new trading ranges below 1.33, which is within reach of the lows for the year at 1.3145. Some of the negative activity was driven by the poorly received treasury auction in Italy on Friday, where yields on the 2-year note rose above 8% at one stage (a new all time high). The yield curve inversion between the 2-year and 10-year bonds in another cause for concern, as the additional funding costs are seen as a drag on Italy’s ability to return to growth.
Market rumors of an IMF loan (valued at 600 billion Euros) have started to circulate and this is adding to the jittery climate that is currently in place. Other news centered on Belgium, where Standard and Poor’s downgraded the long term credit rating by one level (to AA) and added a negative outlook for the country. It could be said that markets have not fully reacted to this news, as treasury markets in the Eurozone were closed before the release.
In the UK, Chancellor Osborne made comments discussing government plans to insure bank loans (valued at 20 billion Pounds) to small private companies with the attempt of lowering borrowing costs for these businesses. This theme of government stimulus was reiterated by the BoE’s Fisher, who said that during the last policy meeting, he voted to increase the government asset purchase program by 75 billion Pounds. Additional stimulus of this nature would inevitably lead to revisions for UK consumer inflation and bring renewed debates on potential increases in interest rates.
A somewhat related story surfaced in New Zealand yesterday, where John Key was elected Prime Minister on a platform of reducing current levels of publicly held assets and if his party is able to pass legislation to achieve this, we could actually see some inflows into the New Zealand Dollar in the form of foreign investments. These assets could be seen as an attractive opportunity, given the declines we have seen this quarter in the NZD.
Today’s macro data will come in the form of US Home Sales but the market reaction to the bond auctions in Europe still have the potential to be the driving factor in today’s trade. This essentially points to choppy trading conditions, as markets return from last week’s holiday.
The EUR/CHF is remaining well supported above the 1.20 level, with prices most recently finding a bounce out of the 61.8% Fibonacci level on the 4H timeframe. The move suggests another test of the highs at 1.2450 and it is starting to look like bullish traders might not get another opportunity to buy into the 1.20 region. The prudent move, however, is to wait for some type of meaningful pullback, so as to justify risk to reward ratios.
The S&P 500 long term downtrend remains in place but to start the week we are seeing a bounce from some critical Fib support at 1150. Short term, the move is encouraging and is likely to continue until oversold indicators are able to reset themselves. A break of support, however, would be significantly bearish, and put the yearly lows back into view.