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Euro Still Locked in Consolidation But We Look for Renewed Weakness

Although the problems in Greece are far from resolved at this point, it seems as though market participants have shifted their focus elsewhere, with Italy now in the spotlight. The fear of contagion is becoming a major reality and with Italian bond yields widening to record levels, today’s parliamentary budget vote will be critical. Bond spreads in Italy have now widened out to levels which the UK Telegraph reminds could very well result in margin requirement adjustments, and this in turn would unleash a fresh wave of systemic risk. We therefore continue to project additional weakness in the Euro and other risk correlated currencies going forward and would expect the US Dollar to be the primary beneficiary of these flows. Look for a break in Eur/Usd below 1.3680 on Tuesday to strengthen outlook, while back below 1.3605 will confirm and accelerate declines. Rallies are expected to remain well capped below 1.3870.

Elsewhere, the Australian Dollar continues to show relative weakness, with the risk off market environment and some more disappointing economic data weighing on the higher yielding currency. Monday’s softer ANZ job ads reading has been followed up on Tuesday with some disheartening trade data. Meanwhile in the UK, industrial and manufacturing production numbers were on the whole better than expected, which helped to prop the Pound against most currencies intraday. The Swiss Franc also continued to generate attention, with SNB Jordan opening some profit taking in Eur/Chf after warning that it is wrong to engage in competitive devaluation. Looking ahead, the North American economic calendar is rather light, with the only key release coming in the form of Canada housing starts. On the official circuit it is a busy session with Bank of Canada’s Carney, SNB Hildebrand, EU Van Rompuy, EU Barroso, Fed Kocherlakota, Fed Plosser and Canada FinMin Flaherty all slated to speak. US equity futures and oil prices are moderately higher while gold is mildly offered.