The Euro managed to hold onto another day of gains despite the G8’s somewhat tepid assurances to continue to work towards a resolution for the Eurozone sovereign debt crisis. World leaders said that they will work to ensure Greece remains in the Eurozone and simultaneously work to revitalize the global economy. Political analysts have generally dismissed the G8’s assurances saying that it was primarily talk and of little substance.

As reported at 12:43 p.m. (JST) in Tokyo the EUR/USD was trading at $1.2799, a gain of 0.15% from Friday’s late trading in New York and nearly 1.2% higher than the 4-month low hit earlier on Friday. Currency strategists say that it was primarily moves to cover a record amount of shorts which helped the common currency hold onto the recent gains, but that the pressure for a longer term downward trend remains intact as the economic fundamentals are clearly lacking. What traders are watching for now is a break below $1.2624, which is seen as a major chart point and which, if broken, could push the Euro to lows not seen in nearly two years.

Safe haven currencies continue to trend higher as global uncertainty remains high; the U.S. Dollar Index last Friday struck a 4-month peak, while the USD/JPY pair was trading at 79.15 Yen.

Article source: http://www.dailyforex.com/forex-news/2012/05/Uncertainty-Prevails-to-Pressure-Euro/12278

During his field study in Wuhan, capital of China’s Hubei province, Premier Wen Jiabao urged enhanced efforts to maintain economic growth which has moderated rapidly since the last quarter of 2011. Wen’s comments indicated that the country has placed growth in a higher priority than before and more easing measures are anticipated to be put forward. We expect further RRR reduction. Yet, besides this, there are several other ways the government would consider in bolstering growth.

China’s Premier Wen jiabao said that the country ‘should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations’. The government would ‘continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth’. Measures to stimulate growth include structural tax reforms, electrical appliances and building material rural subsidy program, strategically important infrastructure projects, private capital investments into railway, public administrative, finance, energy, telecom, education and medical services. The comments indicated the government’s commitment to strengthen growth in the world’s second largest economy.

China’s GDP grew -8.1% y/y in 1Q12, easing from +9.2% in 4Q11. Economic data released in April was disappointing. For instance, growth in industrial production slipped to +9.3% y/y in April from +11.9% in the prior month. Retail sales growth eased to +14.1% y/y in April from +15.2% in March. Export growth declined to +4.9% y/y in April from 8.9% a month ago. These signaled that growth would moderate further in the second quarter and might fall below +7.5% in there’s no rebound in May and June.

The PBOC announced to cut the RRR by -50 bps on May to inject liquidity to the financial system. However, the impacts are not expected to be long-lasting and it appears that the government will need to follow up by implementing further reduction in coming months. Other than RRR reduction, there are other measures that the government would take to bolster growth. As mentioned in the Wuhan, the government ‘will continue to implement structural tax reductions to ease companies’ financial burdens’. The government may consider relaxing restrictions on lending to developers that focus on ordinary commodity housing. The government should also accelerate its VAT reform. Currently only Shanghai and Beijing are chosen to be pilot cities of the VAT scheme. It is expected that more cities should be subjected to the reform which is expected to reduce tax burdens on service industries.

The government can also increase the floating range of lending rates from 10% below the benchmark rate to 30-50%. This not only would lower the funding costs for corporate but also help accelerated China’s interest rate liberalization. The PBOC has given window guidance to some infrastructure projects and it is expected to continue doing so in certain industries it favors. Moreover, the government should speed up the pace of approving new projects.

The Chinese government has committed to refocus the growth structure to domestic to exports. This is increasingly important as the global economic outlook has become fragile. We expect further RRR reduction will follow and the above-mentioned policies should be put in place simultaneously.

Article source: http://feeds.actionforex.com/~r/ActionInsightallReports/~3/nNBhTaLFkuI/

Markets are relatively steady as the week starts. G8′s growth talk over the weekend triggered little reactions. As noted before, risk markets were oversold last week and some consolidative price actions are likely. But risk assets are vulnerable to another selloff on European debt crisis development. Greece could be off the spotlight for a little while since the next election is already set for June 17. Focus has already turned to deteriorating banking sector in Spain and other countries. Euro is also seen deeply oversold as CFTC data showed net Euro short jumped to record 174k contracts in the week ended May 15 and will likely consolidate against dollar and yen first.

The focus of the G-8 meeting over the weekend was undoubtedly on the sovereign debt crisis in the Eurozone. It was stated in the communiqué that world finance leaders “agree on the importance of a strong and cohesive euro zone for global stability and recovery, and we affirm our interest in Greece remaining in the Eurozone while respecting its commitments”. Concerning the global economic outlook, the leaders acknowledged persistence of “significant headwinds” and they pledged to “take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognizing that the right measures are not the same for each of us”. However, there were no further detailed plans on how to resolve the problems.

In China, Premier Wen Jiabao stated that the government “should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth”. And Wen said that China should put “stabilizing growth in a more important position” while refrained from talking about inflation as the country’s economy is “facing increasing downgrade pressure.” The comments indicated that the government sees more is needed to be done to stimulate growth. It’s expected that the PBOC will implement further RRR cuts following last week’s reduction which would inject RMB 400B to the banking system.

On the data front, UK rightmove house price was unchanged in May. Rightmove said that “if Greece defaults then the knock-on effects could be a further reduction in mortgage availability and weakening consumer sentiment causing even more potential buyers to sit on their hands”. Japan all industry activity index dropped -0.3% mom in March.

Daily Pivots: (S1) 100.02; (P) 101.20; (R1) 101.85; More

A temporary low is in place at 100.20 and EUR/JPY’s recovery from there continues higher today. Intraday bias is turned neutral and stronger recovery could be seen back to 4 hours 55 EMA (now at 102.48). But upside should be limited well below 104.61 support turned resistance and bring fall resumption. Below 100.20 will extend the fall from 111.43 to retest 97.03 low next.

In the bigger picture, the down trend from 169.96 is still in progress and fall from 111.43 is like resuming such down trend. Break of 97.03 will target 61.8% projection of 123.31 to 97.03 from 111.43 at 95.18 and below. Nonetheless, note again that we’re favoring the case that pattern from 139.21 is a falling wedge with bullish convergence condition in weekly MACD. Fall from 111.43 should be the last leg in such pattern. Hence, we’ll expect strong support below 95.18 to contain downside, form a major bottom and bring reversal. So, focus will be on reversal signal below 95.18.

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Risk aversion dominated markets last week and wold stock markets turned negative for the year as MSCI world index erased all it’s gains this year. We’re talking about SP 500 having the losing losing streak since last August. Major European indices fell last week with notable fall in FTSE by -5.5%, CAC by -3.9% and DAX by -4.7%. Greece ASE tumbled as much as -10%. The chance of Greece exit jumped as political leaders failed to form a coalition government and is heading for new election in mid-June. But the worry didn’t stop there. The deeper concern is indeed in the Eurozone financial sector as a whole as well as all peripherals. Benchmark 10 year Spanish yield jumped to as high as 6.5% during the week, highest since last November, before closing at 6.25% while 10 year Italian yield close rose to 5.78%.

Risk markets look oversold for the moment and might consolidate in early part of the week. DOW and SP 500 are trying to draw support from the important 55 weeks EMA and attempt for recoveries. EUR/USD is also trying to consolidate above this year’s low of 1.2625. But stocks, European majors, commodity currencies are vulnerable to deeper fall. Greece will possible be off the highlight until the next election and focus will be on negative news from Spain and Italy. A few developments to note, though. Firstly, yen has caught up and is indeed over-powering dollar as markets are starting to speculate QE3 again based on financial market turmoils and weak US economic data. Secondly, precious metal has indeed recovered from early selling on QE3 speculation. Such speculations could limit dollar’s momentum to rally. Thirdly, Sterling’s fate against Euro has somewhat turned since the dovish BoE quarterly inflation report.

In Greece, after all efforts, including that from president Papoulias, political leaders failed to form a coalition government. New election was declared which set for June 17. The anti-austerity Syriza and pro-bailout New Democracy take turn in leading polls. June’s election is described as a vote for staying in or leaving Eurozone. Speculations on the political situation will continue over the coming weeks. But we’d like to emphasize again that no conclusive result is guaranteed from June’s election. The situation might just repeat again, creating even more uncertainties to markets.

Meanwhile, Fitch downgraded Greece’s long-term credit rating from B- to CCC and cited that it “reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union”. The rating agency noted that the May 6 parliamentary elections and subsequent failure to form a government showed “lack of public and political support” for austerity and bailout from EU and IMF. And, “in the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF program of fiscal austerity and structural reform, an exit of Greece from (the euro) would be probable”.

In response to the heavy withdrawal of deposits from Greek banks, the ECB announced that it will suspend lending to some of the institutions it does not consider as solvent. The central bank stated that “once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations”.

Markets are also deeper concerned with Spain’s banking sector. There were reports that Bankia, the Spanish bank that was nationalized recently, received more than EUR 1b withdrawal since last week. Moody’s downgraded credit rating of 16 Spanish banks, citing that “banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness”. The rating agency believed “the Spanish economy has fallen back into recession in first-quarter 2012″ and it does not expect conditions to improve this year. The downgrades also indicated that the reforms (including additional provision requirements for banks, availability of government capital injections, creation of a framework for “bad banks” and employment of independent audits) announced by the Finance ministry are views as insufficient to stem the problems in the country’s banking sector. More in Moody’s Downgrade Unveils Insufficiency Of Latest Spanish Banking Reform.

Also, Moody’s downgraded 26 Italian banks to “amongst the lowest within advanced European countries” on “susceptibility to the adverse operating environments in Italy and Europe”. The banks are downgrade by at least one notch and for some as many as four notches. All 26 banks are assigned a negative outlook. The rating agency cited that Italy is back in recession and loan demands were weighed down by austerity measures. Banks would be facing deepening loan losses as well as more difficult access to funding. Though, support from ECB has lowered risk of default for many banks.

Regarding the economy, the Eurozone economy turned out to be slightly better than expected in 1Q12. Notwithstanding consensus forecast that the region would technically fell to recession with two consecutive quarters of contractions, the flash GDP data came in flat, compare with 4Q12’s -0.3% drop. Despite the apparently stronger than expected growth figure, the upside surprise mainly concentrated in a few countries and more peripheral economies, e.g.: Italy, have confirmed sharp recession. Investors should remain cautious about the Eurozone economic outlook. While the preliminary data still has chance to be revised lower, deep contraction might actually be reflected in the second quarter due to member countries’ fiscal consolidation. More in Eurozone Avoids Recession Temporarily, More Negative Effects To Be Seen In 2Q12.

From US, the April FOMC minutes released overnight indicated that policymakers acknowledged improvements in economic growth but these remained insufficient to change its current accommodative policy stance. While there was slight change in language from the previous meeting, it appeared that the central bank turned mildly more dovish. Overall, the Fed continued to pledge that it would do more if the economy deteriorates further. More in Language Of FOMC Minutes Signaled More Dovish Outlook.

From UK the BOE released a dovish quarterly inflation report in May, lowering both inflation and GDP growth forecasts from February projections. Policymakers also cited the worsening situation in the Eurozone would affect the UK’s path to recovery and there was a “risk of a storm heading our way from the continent”. The central bank revised down its growth forecast for this year to +0.8% from +1.2%. The growth forecast in 2 years fell from +3% to 2.6% in the latest report. As stated in the report, prospects for the country’s growth are “unusually uncertain”. Concerning inflation, the forecast in 2 years was revised to +1.6% from previous projection of +1.8%. More in BOE Revised Lower Growth and Inflation Forecasts.

The RBA released minutes about the rate cut in May, unveiling the policymakers believed monetary easing is needed to stimulate growth. It’s stated that “growth outside of the mining sector was expected to be below trend in the near term, affected by the high exchange rate, softer government spending and subdued conditions in the housing market and building industry”. Moreover, “with financial markets remaining unsettled, the risks emanating from Europe continued to cloud the global outlook”. More in RBA Releases Dovish Minutes in May

Technical Highlights

Dollar index climbed further higher as expected as reached as high as 81.75 last week. Though, some resistance was seen near term 81.78 high which triggered retreat. Initial bias is neutral this week for consolidations. But we’ll stay cautiously bullish as long as dollar index stays above 80 psychological level and expects further rally ahead. Break of 81.78 will confirm resumption of whole medium term rise from 72.69 and should target 61.8% retracement of 88.70 to 72.69 at 82.565 and above.

SP 500 dropped further as expected and reached as low as 1291.98, just inch above mentioned 38.2% retracement of 1074.77 to 1422.38 at 1289.59. We’re anticipate some near term support at around current level, as the 55 weeks EMA is sitting at 1298.2 for the moment. SP 500 could consolidate for a while initially this week. But outlook will continue to say bearish as long as 1357.38 resistance holds. Deeper fall is expected to 61.8% retracement at 1207.55 next. It’s still early to conclude if the up trend from 666.79 has finished. But outlook is starting to look bad for at least a test on the long term trend line support below 1200 level should SP 500 sustain below the 55 weeks EMA.

EUR/JPY’s fall from 111.43 accelerated to as low as 100.20 last week and there is no so sign of bottoming yet. Initial bias remains on the downside this week and current decline should extend to retest 97.03 low next. On the upside, above 101.90 will turn bias neutral and bring consolidations. But recovery is expected to be limited below 104.61 support turned resistance and bring fall resumption.

In the bigger picture, the down trend from 169.96 is still in progress and fall from 111.43 is like resuming such down trend. Break of 97.03 will target 61.8% projection of 123.31 to 97.03 from 111.43 at 95.18 and below. Nonetheless, note again that we’re favoring the case that pattern from 139.21 is a falling wedge with bullish convergence condition in weekly MACD. Fall from 111.43 should be the last leg in such pattern. Hence, we’ll expect strong support below 95.18 to contain downside, form a major bottom and bring reversal. So, focus will be on reversal signal below 95.18.

In the long term picture, up trend from 88.96 (00 low) has completed at 169.96 and made a long term top there. Based on the five wave structure of the rise from 88.96 to 169.96, we’re favoring that fall from 169.96 is corrective in nature. Current development argues that 97.03 might not be the bottom yet but reversal should be around the corner considering bullish convergence condition in monthly MACD.

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Euro recovers mildly as it’s trying to consolidate ahead of 2012 low aginast dollar but strength is very weak so far. The never-ending debt crisis is still weighing on sentiments. EU trade commission Karel De Gucht was quoted saying there ECB and EC are working on “emergency scenarios if Greece shouldn’t make it.” He noted that there was “no margin” left for any concessions to Greece. But he’s confidence that “a Greek exit does not mean the end of the euro, as some claim”. Meanwhile, he expressed that Greece will stay in EU and should there be a third election or a reference on Eurozone,Greeks would “perhaps vote differently.”

German finance minister Wolfgang Schaeuble said that the “crisis of confidence in euro” could last 12 to 24 months before seeing :calming of the financial markets.” Schaeuble reiterated that European officials want Greece to stay in the euro, but “presupposes that Greece does on its side what is necessary to develop its economy”. Schaeuble is “open to all suggestions which would help us to increase growth but we have to see if these propositions are useful”

Over all, markets are still in deep worry on the Greece situation as well as the European banking sector. Despite further banking reform, Moody’s announced yesterday to downgrade 16 Spanish banks with ratings of Banco Santander (SAN) SA and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s biggest lenders, cut 3 notches to A3. The rating agency stated that the downgrades were mainly due to reassessment of each bank’s standalone credit quality which is expected to deteriorate further in the coming year. Moreover, downgrades of 5 banks were also due to anticipation of reduced support from the Spanish government. More in Moody’s Downgrade Unveils Insufficiency Of Latest Spanish Banking Reform.

On the data front, German PPI rose less than expected by 0.2% mom, 2.4% yoy in April. Canadian CPI rose 0.2% mom, 2.0% yoy in April, above expectation of 0.3% mom, 1.9% yoy. CPI core rose 0.4% mom, 2.1% yoy, above expectation of 0.3% mom, 1.9% yoy. Markets showed little reaction to the data.

Daily Pivots: (S1) 1.2659; (P) 1.2704 (R1) 1.2742; More…..

EUR/USD continues to lose momentum ahead of 1.2625 support and at this point, intraday bias is turned neutral first. Above 1.2758 will bring stronger recovery to 4 hours 55 EMA (now at 1.2846) and possibly above. But strong resistance should be seen at 1.2994 to limit upside and bring fall resumption. Sustained break of 1.2625 will confirm resumption of whole decline from 1.4939 and should target 61.8% projection of 1.4246 to 1.2625 from 1.3486 at 1.2484 next.

In the bigger picture, fall from 1.4939 is treated as a falling leg inside the consolidation pattern that started at 1.6039 (2008 high) and current development suggests that it’s not finished yet. Break of 1.2625 would likely pave the way to 1.1875 and below as the consolidation extends. Meanwhile, break of 1.3486 resistance should now indicate that the fall from 1.4939 is finished and will turn near term outlook bullish for 1.5 psychological level to continue the long term consolidation.

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
06:00
EUR
German PPI M/M Apr
0.20%
0.40%
0.60%

06:00
EUR
German PPI Y/Y Apr
2.40%
2.60%
3.30%

12:30
CAD
CPI M/M Apr
0.40%
0.30%
0.40%

12:30
CAD
CPI Y/Y Apr
2.00%
1.90%
1.90%

12:30
CAD
BoC CPI Core M/M Apr
0.40%
0.30%
0.30%

12:30
CAD
BoC CPI Core Y/Y Apr
2.10%
1.90%
1.90%

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The Euro continues to decline on rising contagion fears and growing worries that Greece will be compelled to exit the Eurozone. As reported at 2:05 p.m. (JST) in Tokyo, the Euro was trading 0.2% lower at $1.2674, increasing the month’s loss to 4.1% and edging closer to the 2012 trough of 1.2624 which analysts say will put the EUR/USD pair at a low not seen in more than 20 months. One currency analyst believes that there could be some albeit limited support from options-related players ahead of a weekend that includes a meeting of the G8. The Greek election is scheduled for mid-June, and analysts expect that if the anti-austerity parties take a firmer foothold, it will hasten the Euro’s downtrend with 1.20 likely tested at that time.

The Euro was able to inch higher against the Japanese Yen, and the EUR/JPY pair was recently trading at 100.71, not far from the February 7th low of 100.56 Yen. The Yen gained broad strength yesterday after the country posted a much better than expected first quarter GDP number, but the government’s to preventing the Yen’s rise from safe haven-seeking investors is keeping currency traders wary. The Finance Minister of Japan said that he was worried about the currency’s renewed strength and was carefully monitoring movement, a signal to investors that the government would not hesitate to again intervene.

Article source: http://www.dailyforex.com/forex-news/2012/05/Euro-Declines-as-Contagion-Fears-Rise/12257

Market sentiments were further hurt by worries on Spain, Greece and European banking sector as a whole. Moody’s downgrade of 16 Spanish banks and the surging yield in bond auctions sent Spanish CDS to record high of 552 bps while benchmark 10 year yield continues to march towards 7% unsustainable level. Fitch downgraded Greece on risk of Euro exit. Asian equities are broadly lower following the -1.24% fall in DOW overnight while dollar index is heading closer to 2012 high of 81.78. Note that, this round, yen is the biggest winner and overshadowed dollar as markets are starting to expect additional easing from Fed due to global financial market risks and recent weak US economic data.

Moody’s downgraded credit rating of 16 Spanish banks, citing that “banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness”. The rating agency believed “the Spanish economy has fallen back into recession in first-quarter 2012″ and it does not expect conditions to improve this year. Banco Santander (SAN) SA and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s biggest lenders, were cut 3 levels to A3. According to moody’s, the downgrades were mainly driven by reassessment of each bank’s standalone credit quality which is expected to deteriorate further in the coming year. However, the downgrades also reflected an assessment of reduced support from the Spanish government for 5 banks. The downgrades also indicated that the reforms (including additional provision requirements for banks, availability of government capital injections, creation of a framework for “bad banks” and employment of independent audits) announced by the Finance ministry are views as insufficient to stem the problems in the country’s banking sector.

Fitch downgraded Greece’s long-term credit rating from B- to CCC and cited that it “reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union”. The rating agency noted that the May 6 parliamentary elections and subsequent failure to form a government showed “lack of public and political support” for austerity and bailout from EU and IMF. And, “in the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF program of fiscal austerity and structural reform, an exit of Greece from (the euro) would be probable”. The latest polling result indicated that the pro-bailout New Democracy party has now 2 points leading over the SYRIZA party. If that’s case in the reelection in June, the New Democracy party would be able to form a government with the Pasok party. A coalition government formed by these 2 parties is expected to be less aggressive in overthrowing the pre-agreed austerity measures and imply a lower chance of the Greek exit from the Eurozone. But again, the situation is far from being certain and we’d like to emphasize again the there June 17 election would just be as indecisive as the May 6 one.

Looking ahead, Spain and Greece will remain the focus of all markets. In particular, eyes will be on how quick will Spanish yield jump following this week’s events. On the data front, German PPI and Canada CPI will be released.

Daily Pivots: (S1) 124.26; (P) 126.12; (R1) 127.09; More…

GBP/JPY’s decline extends further to as low as 124.64 so far today and intraday bias remains on the downside for 61.8% retracement of 116.83 to 133.48 at 123.19 next. Break of the lower channel line suggests that acceleration and sustained break of 123.47 will target a test on 116.83/117.29 support zone. On the upside, above 125.72 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited by 127.10 support turned resistance and bring fall resumption.

In the bigger picture, the acceleration of the fall from 133.48 raises the chance that whole rebound from 116.83 is finished with three waves up to 133.48 already. The corrective structure in turn argue that medium term choppy decline from 163.05 is not finished yet. Sustained break of above mentioned 123.19 fibo level will likely send GBP/JPY through 116.83 to extend the long term down trend.

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
06:00
EUR
German PPI M/M Apr

0.40%
0.60%

06:00
EUR
German PPI Y/Y Apr

2.60%
3.30%

12:30
CAD
CPI M/M Apr

0.30%
0.40%

12:30
CAD
CPI Y/Y Apr

1.90%
1.90%

12:30
CAD
BoC CPI Core M/M Apr

0.30%
0.30%

12:30
CAD
BoC CPI Core Y/Y Apr

1.90%
1.90%

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Despite further banking reform, Moody’s announced to downgrade 16 Spanish banks with ratings of Banco Santander (SAN) SA and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s biggest lenders, cut 3 notches to A3. The rating agency stated that the downgrades were mainly due to reassessment of each bank’s standalone credit quality which is expected to deteriorate further in the coming year. Moreover, downgrades of 5 banks were also due to anticipation of reduced support from the Spanish government. Both the EU and the IMF welcomed the latest round of reform announced in Spain earlier in the month. However, in our opinion, the 4 key measures, including additional provision requirements for banks, availability of government capital injections, creation of a framework for ‘bad banks’ and employment of independent audits, while indicating some progress for the restructuring, are rather modest and are not expected to have significant impacts on transforming the banking sector.

The Spanish finance ministry announced several measures to reform in an attempt to stem the problems in the banking system. Regarding the measures, the EU said that, ‘by deciding on these important measures for the banks…Spain is taking decisive action in addressing remaining vulnerabilities within the sector’. The IMF also said that it endorsed ‘the authorities’ approach of significantly raising provisions as a cushion against potential future losses, of providing a government backstop to those institutions that may need additional time, of restructuring and resolving the banks with state participation, and of implementing an independent diagnostic review of all banks’ portfolios to frame appropriately further steps’.

The new round of reform requires banks to increase provision on performing property loan of 30B euro. Together with the 54B euro announced in February, the total recapitalization/ provisioning capital would amount to 84B euro. The banks will need to comply with this requirement by December 31, 2012 and they will have to submit a plan to the Bank of Spain by June 11 regarding how they will comply with the new requirements.While banks are expected to finance the need through retained earnings, any potential capital shortfall will be funded by the government (the FROB) at the maximum of 15B euro, in the form of 5-year convertible bonds at an interest of around 10%. While the idea of increasing the provisioning amount is good, the liquidity injection by the government is too limited. Given the recapitalization vehicle has 5B euro left, the new issuance would only be 10B euro

Benefits of the ‘bad bank’ policy are limited. In contrast with Ireland’s establishment of 1 bad bank, Spanish banks are to create their own asset management companies with the foreclosed assets transferred to them at book values for future disposal. However, the banks will continue to own these assets while the government is not expected to fund these banks. With the help of the government and inability of transferring assets such as non-performing loans and sub-standard loans to the new entity, quality of the banks will hardly be enhanced.
The government would hire 2 independent auditors to evaluate the sector’s overall risk portfolio. The move aims to increase the credibility of the system and restore the lost investor confidence. No timing nor detailed plan were given regarding this measure. However, the auditors are anticipated to be in place by the end of the year. It’s also reasonable to anticipate the external valuation raise the provisioning requirements for the banks in more problematic assets. In this case, the additional provisions required by the government, which are viewed by some market participants as inadequate, will have to be raised further. Confidence will inevitably be undermined if the government fails to respond (by increasing the provisioning requirement) on a timely basis.

We welcome the new measures of the Spanish banking reform. However, while it points to a right direction, the size of the restructuring (both in terms of provision requirement and government injection) is too small to generate significant impact in the sector. The continuous rise in Spanish bond yields and the latest Moody’s downgrade are good reflections that the market is not confident that the country’s unhealthy banking sector would be cured with only these measures. We do hope that these are only the first steps of a mega scale restructuring.

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Euro’s selloff resumed today after brief consolidation on negative news out of Spain. While markets are clearly still concerned with Greece situation, result of next election and whether Greece will exit euro eventually, investors are equally concerned, if not more, on the situation in Spain. The sharp jump in yield in today’s Spain bond auctions reflected such worries. And news from Spain dragged European equities broadly down. Meanwhile, Sterling’s fate has turned since the dovish BoE quarterly inflation report released yesterday. The pound seems to be losing its safe haven status in Eurozone political turmoil and the selloff accelerates today.

Spain sold EUR 2.494b of bonds today with solid demand. However, yields were sharply up as recent turmoils in Greece hurt investor confidence. Yield on January 2015 bond came in at 4.375%, up from 2.89% in last auction on April 4. Yield on July 2015 bond came in at 4.876%, up from 4.037% on May 3. Yield on April 2016 bond came in at 5.106%, sharply up from 3.374% on March 15. Benchmark 10 year yield jumped back to above 6% level and there were talks that yield could march to the so called unsustainable 7% level which eventually triggered bailout of Greece, Ireland and Portugal.

Other news from Spain wasn’t much better. There were reports that Bankia, the Spanish bank that was nationalized recently, received more than EUR 1b withdrawal since last week. Shares of Bankia plunged more than -16% today and led the stock markets lower. Spain’s GDP contracted -0.3% qoq, -0.4% yoy in Q4, inline with preliminary reading. The data confirmed that austerity measures are weighing on the economy.

World Bank President Robert Zoellick yesterday warned of the “ripple effects” on the rest of eurozone on Greece exit. Zoellick noted that the “core question will actually not be Greece, it’s Spain and Italy”. When the happens, it will start to “affect confidence” and will have “illiquidity moments”. He also said that the capitalization in European Investment Bank is not enough and there is need for medium term insurance for investors. He favors issuance of “eurobonds” to help stabilizing the European economy and give time for Spain and Italy to implement medium term fiscal reforms.

On the data front, New Zealand PPI input rose more than expected by 0.3% qoq in Q1 while PPI output dropped -0.1% qoq. Japan GDP rose slightly more than expected by 1.0% in Q1, industrial production was revised up to 1.3% mom in March. US initial jobless claims was unchanged at 370k. Canadian International securities transactions dropped CAD -2.08b in March while wholesale sales rose 0.4% mom.

Daily Pivots: (S1) 127.47; (P) 127.98; (R1) 128.31; More…

GBP/JPY’s fall accelerates today to as low as 126.68 so far. The break of 127.10 support confirmed resumption of whole decline from 133.48. Intraday bias remains on the downside for 61.8% retracement of 117.29 to 133.48 at 123.47 next. On the upside, above 127.82 minor resistance will turn bias neutral and bring consolidations first.

In the bigger picture, we’d like to point out that GBP/JPY has been the relatively stronger yen cross. The choppy decline from 163.05 should either be a diagonal triangle or the second leg of a consolidation pattern from 118.81. In either case, 116.83 is a medium term bottom and fall from 133.48 should be contained above this level. And, rise from 116.83 should eventually resume and pass through 140.02 resistance towards 163.05 key resistance level. We’ll maintain this view unless the structure of the fall from 133.48 suggests otherwise.

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
22:45
NZD
PPI – Inputs Q/Q Q1
0.30%
0.00%
0.50%

22:45
NZD
PPI – Outputs Q/Q Q1
-0.10%
0.20%
0.10%

23:50
JPY
GDP Q/Q Q1 P
1.00%
0.90%
-0.20%

23:50
JPY
GDP Deflator Y/Y Q1 P
-1.20%
-1.40%
-1.80%

01:00
AUD
Consumer Inflation Expectation May
3.10%

3.30%

04:30
JPY
Industrial Production M/M Mar F
1.30%
1.10%
1.00%

12:30
CAD
International Securities Transactions (CAD) Mar
-2.08B
9.34B
12.49B

12:30
CAD
Wholesale Sales M/M Mar
0.40%
0.40%
1.60%

12:30
USD
Initial Jobless Claims
370K
375K
367K

14:00
USD
Philly Fed Survey May

12
8.5

14:00
USD
Leading Indicators Apr

0.10%
0.30%

14:30
USD
Natural Gas Storage

25B
30B

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Article source: http://feeds.actionforex.com/~r/ActionInsightallReports/~3/txfHc_soRHM/

Though the Euro clawed higher, it remains vulnerable as fears of a Greek exit grow on the backs of news that some Greek banks are experiencing a funding crisis. Analysts say that the EUR/USD will remain near to a 4-month low, and could trend lower as additional news emerges from the Euro area fuels existing worries.

As reported at 11:44 a.m. (JST) in Tokyo, the Euro was trading against the greenback at $1.2740, a 0.2% gain on the day, but not too far from the 1.2681 low struck yesterday. The EUR/USD has lost 4.1% so far this month, and has several times come close to hitting the year’s low of 1.2624. As one analyst puts it, even if the Euro gets some respite it won’t change the fundamentals; markets will still be waiting on the Greek outcome, but in the meantime it’s a bearish environment.

Commodity linked currencies were also feeling the pressure from the Greek fallout; the Australian dollar has finally managed to eke out more than a few pips gain and was most recently trading against the greenback at 0.9952, moving further off the 5-month low of $0.97870 that was struck on Wednesday. The NZD/USD pair was trading at 0.7673, slightly off the day’s low of 0.7656.

Article source: http://www.dailyforex.com/forex-news/2012/05/Euro-and-Aussie-Feel-the-Pressure/12239