Euro hit its lowest level in 10 months and the Italian crisis is still worsening
Italy’s political woes ignited fears of another Euro Zone crisis even as Spain’s government faced a no-confidence vote in Parliament Friday. Safe-havens Yen and Swiss Franc rose while the Euro sank. Italian assets plummeted as Europe’s third-largest economy faced fresh elections with some parties running on an Italexitplatform. Global stocks tanked while bond yields slumped. The VIX (Volatility) Index jumped 29%.
Outlook: While the Dollar Index (USD/DXY) ended higher supported by risk-off, it’s not a one-way street for the Greenback from here. US President Trump imposed a 25% tariff on US$ 50 billion of Chinese goods. ECB Board member Sabine Lautenschlager said the central bank may decide to exit it longstanding QE policies in June. The drop in the US bond yields was larger compared to that of its global peers.
Economic data released yesterday was mixed. US Case Shiller House prices equaled the previous month's gains. The US Conference Board Consumer Confidence Index matched expectations in May although April’s level was revised down. Today sees the start of more relevant data culminating in tomorrow’s US Payrolls.
The Euro sank to 1.15098 a low not seen since July 2017. We highlighted that the speculative community was long of Euro bets at historically high levels. In the current environment, the Euro is still vulnerable. Euro bears are now bearing in on Spain where Prime Minister Rajoy’s minority center-right government will face a no-confidence vote in Parliament. At the center of this drama is a corruption case which ended in several convictions to senior members of Rajoy’s party.
Only a generally weaker US Dollar will provide the Single Currency some relief.
The VIX (Volatility Index) soared 30% to close at 17.02 from 14.62. While this is elevated, it’s still below the 20.00 level. And we’re still way below the highs that we saw in February.
With the latest developments taking the market in all directions, let’s not forget that market positioning and yields matter. Apart from the Euro, speculators are mostly long of USD bets. Net total speculative long USD bets increased to their highest this year (latest CFTC/Reuters report). The bulk of those USD longs are against the Aussie, Canadian Dollar and Swiss Franc.
The yield on the US Ten-year bond dropped 15 basis points to 2.78%. Germany’s Ten-Year
Bund yield was down 9 basis points to 0.25%. The yield on Japan’s 10-year JGB fell to 0.02% from 0.03%. Australia’s 10-year yield closed at 2.68% from 2.75%.
Economic events and data released today: BOJ Governor Kuroda speaks in Tokyo at the BOJ-Institute for Monetary and Economic Studies annual conference. Japanese Retail Sales (Annualised), Australian Building Approvals, Germany Retail Sales and Preliminary CPI, Spanish Flash CPI, US ADP Employment Change, Canadian Current Account and Raw Materials Price Index, US Preliminary Q1 GDP, US Goods Trade Balance, Bank of Canada Monetary Policy Meeting and Statement and Overnight Rate
The Dollar Index (USD/DXY) rallied to end at 94.82 (94.415 yesterday), up 0.43%. Much of the rise came through the Euro’s fall. USD/DXY traded to a high of 95.02. Immediate resistance lies at the 95.00/10 level. The next resistance area can be found at 95.20/30. Immediate support can be found at 94.50 and then 94.20. Likely trading range today 94.40-94.90.
EUR/USD – sank to a 10-month low of 1.15098 before rallying to settle at 1.1535 at the New York close. EUR/USD traded to a high of 1.1640 before it lost ground as Italian assets were sold. Comments by ECB Board member Lautenschlager were mildly supportive of the Single Currency. The Euro has fallen from the 1.20 level 2 weeks ago without any rebound. Tonight’s economic data sees the release of German Retail Sales, Preliminary CPI as well as Spanish Flash CPI. The political situation in Italy and Spain are not about to change overnight. However, geopolitics is difficult to predict and can be very fluid. EUR/USD has immediate resistance at 1.1580 and then 1.1630. Immediate support can be found at 1.1500 and then 1.1475. Likely range today 1.1500-1.1600. Trade the range, be nimble.
USD/JPY – slumped to a low of 108.11 before rallying to close at 108.67 this morning. Much of the USD/JPY’s drop was the result of EUR/JPY selling. As Tokyo enter, there should be some corporate USD/JPY buying at the low 108 levels. BOJ Governor Haruhiko Kuroda is expected to speak soon at the BOJ-Institute for Monetary and Economic Studies annual conference in Tokyo. The fall in the US Ten-year yield will keep USD/JPY capped around 108.80 today. The next resistance level is at 109.520. Expect immediate support at 108.30 and then 108.10 (strong). Look to trade a likely range today of 108.20-109.20. Trade the range, be nimble.
AUD/USD – steady grind lower to finish at 0.7505, down 0.53% against the overall stronger Dollar. Most commodities fell with Copper prices down 0.8%. AUD/USD traded to an overnight low of 0.7498. Immediate support can be found at 0.7480/90 which should hold on the day. Immediate resistance lies at 0.7525 and then 0.7555 (overnight high 0.7552). Australian Building Approvals are released today. Likely range today 0.7495-0.7555. We highlighted that net short Aussie positioning are at their most bearish in 2 years. Prefer to buy dips.
USD/ZAR – The rand slumped almost 2% on Tuesday, tracking a bruised euro, which extended losses as political uncertainty in Italy stoked fresh fears about the eurozone.
“The rand (USD/ZAR) weakness is mostly of the back of eurozone uncertainty and dollar strength as a result,” said GT247.com trader Barry Dumas.
By 13:50, the local unit was trading 1.72% weaker at R12.68 to the greenback.
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***Information contained in this newsletter are gathered from third parties and should not be regarded in any way as trade advice or recommendations by CM Trading. CM Trading does not recommend or advise traders or investors in their decision making but merely provides information from the market for its clients as additional information is made available as per the events occurring in the financial markets.
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