EUR regains composure after Russian debt scare, but there is little fuel for sustaining a rally for the single currency.
GBPUSD ran into a brick wall at 1.5000 as GBP consolidates recent gains despite mostly supportive data.
- Switzerland Jan. CPI out at -0.8% vs. -0.4% expected
- Sweden Dec. Industrial Production out at -5.1% vs. -1.2% expected
EUR has squeezed higher all morning in the European session as the Nikkei story overnight about Russian banks delaying repayment of foreign obligations was denied by Russian officials.
Still, the reaction itself speaks volumes about a clear and present danger for the single currency: its enormous loans to many touch-and-go EM countries and what percentage of these loans end up in default. This is a vital issue in addition to the entire ECB/EuroZone framework vulnerabilities that are still the largest open question for the Euro. 1.3000 proved once again to be the line in the sand here for EURUSD as the US session is getting under way.
Interest rate differentials continue to suggest that there is little fuel for sustaining any EUR rally, though so much momentum has come out of the market, that the market could squeeze either way within the 1.2700-1.3300 range for now depending on the direction in risk appetite.
Looking across markets, we note that this seems to be an important inflection point, with the US 10-year treasury benchmark having maxed out at the symbolic 3.00% yesterday (the old cycle low) and with the US S&P500 trading up against flat level resistance in the 875 area and the 55-day moving average in the 866 area. These represent key barriers for the latest rise in risk appetite and the market will have to have a lot of gumption to continue higher from here.
GBP weakened again after yesterday's push at 1.5000 in EURUSD and attempt through 0.8665 support in EURGBP failed to bear fruit. This is despite fairly supportive data in today's releases, including a better than expected Trade Balance number and a BRC report out overnight that showed a strong rise in Retail Sales after seven months in a row of contracting same store sales.
In other European data, Sweden Industrial Production reading for December showed a -20.3% fall in year-on-year comparisons, and this seems to have put in some solid support . Sweden's export engine is suffering as global trade has collapsed and its trade surplus will continue to contract until global economic circumstances stabilize. The Riksbank tomorrow is expected to lower interest rates again by 50 basis points to bring the rate below the ECB rate for the first time since late 2007, as the Riksbank, like nearly every other major central bank, has been quicker to slice rates than the foot-dragging ECB.
There's plenty of activity ahead in the US session today, with a Senate vote later in the day on the compromised version of the stimulus package (the House has already passed its own plan, so if the Senate plan passes, then House and Senate leaders will have to get together to hammer out a final stimulus bill that would go up for a vote later this week).
Also, watch out for the Geithner press conference at 1600 GMT a bit later for the latest on the plans for the US banking system. The latest noise is that the plan could eventually reach the $2 trillion level and it will involve heavy oversight that ensures that participating banks are healthy enough to be able to use the public funds to extend loans before the funds are injected. The plan will be renamed the Financial Stability Plan and the old TARP moniker will be dropped.
To top all of this off, Bernanke will be out testifying at 1800 GMT on the Fed programs before a House panel. The reaction to the Geithner plan could set the tone for markets for the rest of the week.
John Hardy, Forex Consultant for Saxo Bank
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