Euro Slides as Japanese Yen and US Dollar Make Comeback Post-Bernanke

DailyFX   |  June 8 2012 10:12 EDT

With no new easing stimuli measures coming from the globe’s major central banks, and the first Chinese rate cut in four years potentially signaling rocky waters ahead, market participants have jumped back into the Japanese Yen and the US Dollar. Meanwhile, rumors of a Spanish bailout have begun to emerge.

Fundamental Headlines

- Obama Seeking Ally on Europe Finds Merkel a Tough Sell – Bloomberg

- Rajoy Holds Bank Talks with EU as Fitch Downgrades Spain – Bloomberg

- Spain to Request EU Bank Aid on Saturday – Reuters

- Europe’s Vulnerable East Braces for Possible Greek Exit – WSJ

- No Hint from the Fed of Taking New Steps – WSJ

Asian/European Session Summary

Yesterday I wrote, “When was the last time a Fed Chairman announced the plans for a major stimulus package at a Congressional testimony?” This indeed was the case, with Federal Reserve Chairman Ben Bernanke shifting away from the ultra-dovish tone that was expected by market participants and instead he continued to march to the beat of his own drum. Chairman Bernanke has spent the past several months emphasizing transparency and greater credibility at the Fed, and to think that a smattering of disappointing data prints would force a 180 degree turn in Fed policy – and thus diminishing the Fed’s credibility – seemed (and still seems) a little misguided. Thus, for now, quantitative easing remains a possibility, and as always, it will only come if it is absolutely economically necessary – a condition which hasn’t been met yet.

Price action in the overnight sold the “QE trade,” in such that market participants broadly shed higher yielding currencies and risk-correlated assets in favor of the US Dollar. With little important data due from either Asia or Europe (save the better than expected Japanese first quarter GDP reading), there was little reason to move into anything else than the Japanese Yen and the US Dollar, the top two performing currencies thus far on Friday.

Leading the weakness has been the Euro, which is under pressure following reports that Spanish Prime Minister Mariano Rajoy will meet with European Union officials over the weekend to request a bailout for his country’s ailing banking sector. While the Euro initially found strength on this news (the EURUSD rallied approximately 30-pips following the report), it soon sold off quickly and is sitting near session lows just after the US cash equity open. Let’s be clear: a bailout of Spain – one which was deemed unimaginable by the European leadership bloc – suggests that the crisis is now free to spread into the core. Primarily, this would amount to concerns over Italy arising, and with technocratic Prime Minister Mario Monti losing influence in his government, we may just yet be seeing the next leg of the crisis unfold.

Taking a look at credit, the Spanish bailout news and the implications of the crisis spreading to Italy have weighed heavy on periphery debt, but really, only for Italian and Spanish bonds. The Italian 2-year note yield rose back to 3.885 percent while the 10-year note yield climbed back to 5.784 percent; and the Spanish 2-year note yield and the 10-year note yield rose back to 4.194 percent and 6.185 percent, respectively. Elsewhere, Portuguese debt has improved across the board, while it’s worth noting that the US 10-year Treasury Note yield has fallen back to 1.578 percent.

EURUSD 5-min Chart: June 8, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

The Japanese Yen has been the top performer today, with the USDJPY depreciating by 0.28 percent. The Euro has been the worst performer as discussed earlier, shedding 0.81 percent against the US Dollar (the Swiss Franc is also weaker alongside the Euro, having dropped by 0.81 percent). The commodity currencies are also weaker across the board, with the Australian Dollar leading losses, down 0.46 percent.

24-Hour Price Action

Key Levels: 14:00 GMT

Thus far, on Friday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 10232.24 at the time this report was written, after opening at 10198.32. The index has traded mostly higher, with the high at 10242.97 and the low at 10198.26.

--- Written by Christopher Vecchio, Currency Analyst

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