EURUSD Rally Stalls Around Breakout Level At 1.2625 As USD Suddenly Recovers

• EURUSD rally stalls around breakout level at 1.2625 as USD suddenly recovers
• Spanish spreads widening unexpectedly puts paid to EUR rebound
• Asian equity markets move higher but gains very modest against recent backdrop of heavy losses
• EURUSD trades lower overnight, touching 1.2510 as European concerns still abound
• European equities rise sharply on opening-move helps EURUSD back over 1.2550 in early trade
• Spanish retail sales fall over 9% but news overshadowed by improved risk environment
• Gold lifts back from earlier overnight lows as European equity markets rise and the USD drifts lower

Good morning. The moves yesterday were really surprising to me. The break back above 1.26 flipped the nig figure chart and the early move above 1.2620 definitely triggered some stops, I can confirm that, but whilst there were others just above the high reached yesterday (1.2625) it strangely ran out of steam long before the Spanish bond spreads started blowing right out, setting new yield levels for the year as the 10 year bonds touch 6.5%. This morning the yield is drifting back around 6.38%.

There was seemingly some quite hefty interest from ACB’s to enter the market from the blind side and push the EURUSD swiftly lower, in what was at that time a rather benign environment because European equity markets were opening with solid gains across the board. That would imply to me that these guys are very keen to unload EUROS and yesterday’s example of them selling into strength in a fairly quiet market is a sign that there is some real supply up there for the time being.

Therefore it’s likely to be down to equities and bond markets to be the drivers once again for the currency markets. There recent range in the EURUSD between 1.25 and 1.26 won’t last forever; we know that but it does look rather chocked up at the moment with the reputed buying by European CBs’ on the bottom being matched by reputed sales from ACB’s on the topside.

The push lower in the EURUSD overnight has taken place against the background of a benign equity market environment which is perhaps due in part to the modest nature of the Asian equity market gains, which has helped the AUD and the CAD outperform; certainly at the Euro’s expense.

This morning news that Spanish retail sales fell by over 9% on the latest reading has been apparently brushed aside as has the move in Spanish equity markets, which are moving entirely in the opposite direction to the likes of the DAX and other major European bourses.

There’s not much in the way of other data out today and the only significant releases are stateside with the May S+P Case Schiller HPI data and May Consumer confidence later on this afternoon.

Now whilst I cannot be sure it does appear to me that the ACB’s are still keen to unload their significant holdings on EUR on any rally. This is indeed a new departure as over recent years, no matter how bad the situation has got in Europe these players have almost continuously added to EUR reserves, as they sought perpetually to escape the one dimensional nature of total USD reserve holdings.

Therefore if there is a significant reappraisal taking place on the part of these Asian central banks (ACB) it may see a significant unwinding of some of their long term holdings before the chaos of the Greek election result impacts the markets. But it is also possible that they are looking beyond that at Spain and getting decidedly nervous as well.

To endorse the point about ACB selling interest in the EURUSD, the move higher in the EURUSD this morning has already run into a degree of reported ACB selling as the price lifts near 1.2560 which is slowing the upside progress for the EUR and causing it to underperform versus the likes of the AUD, CAD and NZD.

The JPY looks utterly sidelined again as it remains inside its recent 79.30-70 range. The currency is however weakening slightly this morning versus all the other majors and the commodity currencies as they all gain versus the USD. The USD index is slipping back again this morning ala yesterday. However its early days in that respect and the dynamic could soon shift back the other way if equity markets start to slip back by mid morning as they did yesterday.

As commodity currencies rise and the USD drifts lower Gold is edging higher, back towards $1580. There is talk of month end demand for EURGBP, but then again that’s always the case as we approach month end and doesn’t always transpire in the way that it should. We do know that there is always one large European based EURGBP buyer around this time each month, but I will stress that the timing of that is never set in stone. There is talk of a 3pm expiry as well today at 0.8000.

GBPUSD looks better bid this morning and talk of stops above 1.5730 is in the market this morning. As for the downside I haven’t heard of anything special stop wise lower down.