FX open: Euro still faces strong downside pressure

By Francisco Miñana

Date: Tuesday 29 May 2012

The European session got under way with the main equity benchmark indices opening with an average gain of 0.70 per cent.

The Spanish Ibex35 index bucked the trend though due to concerns over domestic economic problems. The high regional government deficits have led Japanese rating agency R&I to downgrade its Spanish sovereign debt rating to A. Furthermore, the use of public debt to recapitalise Bankia, and the financial system in general, has generated its fair share of controversy.

Spain’s risk premium was at 517 basis points this morning. The German bund remained strong with a yield of 1.37%, further pressuring risk premiums higher.

In the foreign exchange market, the dollar lost strength versus the majors. The euro/dollar rose slightly but remains close to the support level at 1.2500, where a medium-term trend line crosses. A breakout may trigger a decline to the June 2010 low of 1.1901, say some analysts. It looks like a fair way off but it will also depend on how the Greek crisis unfolds.

Looking at other currencies, the sterling pound rose versus the dollar and the yen. Carry trade currencies strengthened, led by the aussie on China’s decision to introduce €315bn in new stimulus measures aimed at halting the economic slowdown.

At the macroeconomic front, retail sales fell 11.3% year-on-year in Spain compared to the previous -4.0%. Coming up, there will be budget balance data for Spain and CPI data for Germany. In the US, there will be home price data, consumer confidence, and the Dallas Fed manufacturing index in the United States.

FM

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