FX open: Central banks ready to draw their weapons

By Francisco Miñana

Date: Friday 15 Jun 2012

European equities have been boosted by reports that the main central banks are preparing coordinated action ahead of this weekend’s Greek elections.

The main European benchmark indices opened with an average gain of 0.7% on Friday morning, following Wall Street's lead.

In other central bank news, the Bank of Japan has decided to leave its interest rate unchanged at 0.10% and did not make any changes to its asset purchase programme.

Judging by the reaction of the major currencies in the foreign exchange market, we get the feeling that investors are already discounting potential monetary auction by the Fed and company. The Fed may inject dollar liquidity via swaps, forcing a broad based decline for the greenback and yen appreciation.

Rating agencies are having a grand ole time downgrading Spain’s sovereign ratings. Yesterday, Moody’s did so by three notches; today’s it was JCR, a Japanese agency. The debt markets remain under intense pressure as is evident by a Spanish risk premium of 536 basis points. Spain’s 10-year bond yield is at 6.84% and the German bund yield is at 1.47%.

The euro/dollar is trading above 1.2600 and testing the resistance at 1.2650. The euro/yen trades near 99.60 and the euro/sterling pound trades around 0.8150. The sterling pound is reacting lower on the news of joint action by the UK Treasury and the Bank of England. The former will inject £100bn into the economy and the latter will put in place a plan to increase credit flows. Carry trade currencies rise versus the greenback but fall versus the yen. Nordic currencies are showing strength versus the euro and the dollar.

On the macroeconomic front, we must point out that new automobile registrations fell -8.7% year-on-year in the Eurozone compared to the previous -6.9%. In Spain, first quarter labour costs remained flat at 1.1%.

Coming up, there will be trade balance data in the United Kingdom and the Eurozone. The NY Fed manufacturing index, net TIC flows, industrial production, and consumer confidence from the University of Michigan will be released in the United States.

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