Spanish Woes Fail to Weigh on EUR

The Eurozone had some more bad news today, debt to GDP for the currency bloc for 2012 surged to 90.6% from 87.3% in 2011. This is a large jump in one 12 month period and unsurprisingly there was a lot of divergence between member states. The biggest sting from this data came from Spain - its budget deficit was a whopping 10.6%, the largest in the currency bloc. It occurred even though Madrid enacted large tax increases and cuts in spending. This data is a good argument for how tax increases don't necessarily boost revenue, and could bode ill for countries like Cyprus, who have recently had to increase taxes after receiving a bailout from the Troika.

Pressure on the ECB

This data may not have had an immediate impact on EURUSD, which is still hovering around the 50-day moving average at 1.3055, but in the long-term we think it adds to the pressure on the European authorities to 1, loosen fiscal rules and 2, loosen monetary policy. Thus, today's data, although it dates back to 2012, is still relevant for the EUR as it inadvertently puts pressure on the ECB to cut rates in the coming months. Since the FX market is extremely sensitive to yields, the prospect of future rate cuts should be EUR negative in the medium-term.

EUR - where to next?

From our perspective, the failure to break above 1.3210 - the 50% retracement of the February to March down-move, and is a medium-term top for this cross. Below 1.3055 - the 50-day sma - is bearish in the short term. Below here 1.2950 - the base of the weekly Ichimoku cloud - is a key support zone. The latest CFTC data suggests that short positions in EURUSD were scaled back last week, although the market is still net short EUR. Positioning to the downside is not at extreme levels which suggests two scenarios: 1, the market could sell off sharply if the fundamental backdrop deteriorates for EUR, or 2, the market is fairly neutral around EUR at the moment, and the will is not yet there to push it any lower. I tend to think it is the latter, at least in the short term and thus unless we get a very dovish ECB, or a sharp deterioration in April PMI's, which are released tomorrow, then we could see support at 1.2950 hold.

G20 - what was not said ...

Elsewhere, the G20 meeting last week was devoid of any market moving headlines. However, it was what was not said that mattered for FX traders this morning. The lack of comments about the BOJ's aggressive stimulus programme and the sharp move lower in the JPY since November was taken by the market as a green light to sell JPY during the Asian session. The high so far today has been 99.89; we have drifted down approx. 30 pips as we move towards the US open, partly due to reports of a large option barrier at 100.00. This was successfully defended in mid-April, and could yet again prove to be a sticky level for USDJPY bulls. But patience can be a virtue. CFTC data suggests the market increased its net short position in JPY last week, and it is now at its lowest level since 2007. The market desperately seems to want to push USDJPY above 100.00, however we could be cautious as we lead up to Friday's BOJ meeting, BOJ revised growth and inflation forecasts and CPI data for March. Overall, we think it will happen, and thus any dips back to 99.20 then 98.80 will be used as buying opportunities in USDJPY. Key resistance above 100.00 includes 100.20 - the top of the monthly Ichimoku cloud - above here is a very bullish development for this cross.

End in sight for political deadlock in Italy

Overall, after last week's steep sell off in risk, we have seen markets come back a little today. European stocks are higher, boosted by the re-election of Napolitano as President of Italy. He can now appoint a technocratic government and potentially bring an end to the impasse in Rome. Likewise, commodities are also higher including Brent (back above $100 per barrel) and gold, which is above the $1,425 resistance zone and 38.2 Fib retracement of last week's sharp sell-off.

There is a lot of important data from tomorrow onwards - including PMI data for Europe and GDP data for the UK and US, thus today's session could be all about positioning and waiting to make your move. Ahead today, US existing home sales are due at 1500 BST, the market expects a 0.4% gain, bringing the monthly rate up to 5 million units, which would be the highest level since 2009...

IMOH, Clement I.
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