Surging Spain borrowing costs hit Asian shares, euro

TOKYO (Reuters) - Asian shares, the euro and oil prices fell on Thursday as surging borrowing costs in troubled Spainheightened fears that more countries in the euro zone will be hit hard by the region's debt crisis.

Japan's Nikkei average (.N225) (.T) slid 2 percent while MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> looked set to revisit its 2012 low with a decline of 0.8 percent.

The euro fell in early Thursday trade to a 23-month low of $1.2361 and a 4-1/2 month low against the safe-haven yen below 97.70.

"There is no exit in sight currently for the euro to get out of this downtrend because there is no shortage of negative news," saidHisamitsu Hara, chief FX manager at Bank of Tokyo-Mitsubishi UFJ.

"Problems in Spain, a large euro zone economy, heighten fears while the risk of Greece leaving the euro bloc raises contagion concerns. The euro remains depressed, with players cautiously testing the downside".

Hara added that the euro could weaken until support at the$1.19 level. The euro dipped below $1.19 in June 2010.

A caution by Spain's central banker that Madrid will miss deficit targets this year pushed Spanish 10-year yields above 6.7 percent, close to 7 percent, a level seen as unsustainable and which could push Spain to seek a bailout.

The cost of insuring against a Spanish default scaled a record high near 600 basis points while Italy, which is also struggling with huge public debt, saw its 10-year yields top 6 percent for the first time since January.

Yields on all German bond maturities hit record lows on Wednesday, pushing the premium investors demand to hold Spanish debt over German debt to its highest since the launch of the euro at around 543 basis points.

Those developments led to declines of more than 1 percent for both U.S. and European stocks. Spain's stock market hit a nine-year low.

As risk aversion gripped financial markets broadly, strong bids for safe-haven assets sent 10-year U.S. Treasury yields down to their lowest in at least 60 years at 1.620 percent on Wednesday. The yield on five-year Japanese government bonds fell to 0.20 percent, its lowest since October 2010.

The dollar index (.DXY), measured against a basket of major currencies, extended its rally to reach its highest level since September 2010 above 83.1 on Thursday. The yen rose to a 3-1/2 month high against the dollar at 78.86.

Some analysts said the dollar index could be in for a sustained period of dollar strength for the next couple of years.

The strong dollar and intensifying risk aversion sent the Thomson Reuters-Jefferies CRB index (.CRB), a global benchmark for commodities, tumbling 1.7 percent on Wednesday to its lowest levels since September 2010.

Oil prices fell to multi-month lows on Wednesday and looked set to post their biggest monthly declines since October 2008, a month after the collapse of Lehman Brothers.

U.S. crude futures were down 0.3 percent at $87.60 a barrel on Thursday, after slumping $2.94 to settle at $87.82, the lowest settlement since October 21, 2011.

Brent crude fell 0.3 percent to $103.19 a barrel on Thursday after falling more than $3 to settle at $103.47 a barrel, the lowest settlement since December 16.

The European Commission threw Spain two potential lifelines, offering more time to reduce its budget deficit and offering direct aid from a euro-zone rescue fund to recapitalize distressed banks.

But any relief from the news was quickly offset by the latest Greece polls showing parties for and against a bailout neck-and-neck or very close to each another ahead of a June 17 election that may decide whether Greece remains in the euro.

Asian credit markets were weaker, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 5 basis points early on Thursday.

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EURUSD: Trading Germany’s Unemployment Report

Trading the News: German Unemployment Change

What’s Expected:

Time of release:05/31/2012 7:55 GMT, 3:55 EDT

Primary Pair Impact: EURUSD

Expected: -7K

Previous: 19K

DailyFX Forecast: -10K to 10K

Why Is This Event Important:

Unemployment in Europe’s largest economy is projected to contract 7K after unexpectedly increasing 19K in April, and the improvement in the labor market may prop up the EURUSD as it dampens the risk for a prolonged recession in the euro-area. As the EU continues to rely on Germany to lead the economic recovery, the ongoing improvements in Europe’s powerhouse may encourage the European Central Bank to carry its wait-and-see approach into the second-half of the year, but the central bank may keep the door open to expand monetary policy further amid the heightening threat for contagion. As European policy makers struggle to restore investor confidence, the governments operating under the fixed exchange rate are certainly becoming increasingly reliant on monetary support, and the Governing Council may have little choice but to take additional steps to shore up the ailing economy as the anti-austerity movement sparks an increased rift within the union.

Recent Economic Developments

The Upside

Release	Expected	Actual
GfK Consumer Confidence Survey (JUN)	5.6	5.7
Gross Domestic Product (QoQ) (1Q F)	0.5%	0.5%
Trade Balance (MAR)	14.3B	17.4B

The Downside

Release	Expected	Actual
IFO Business Climate (MAY)	109.4	106.9
Purchasing Manager Index Manufacturing (MAY A)	46.8	45.0
Capital Investment (1Q)	-0.4%	-1.3%

As Germany continues to benefit from global trade, the pickup in economic activity may boost hiring, and a positive development may pave the way for a short-term rebound in the EURUSD as the pair remains oversold. However, the drop in business sentiment paired with the downturn in production may drag on the labor market, and a dismal employment report may fuel speculation for more easing as it raises the risk for a prolonged recession. In turn, should the development fall short of market expectations, the EURUSD may continue to give back the rebound from back in 2010 as it raises the scope for additional monetary support.

Potential Price Targets For The Release

As the downward trending channel in the EURUSD continues to take shape, we maintain a bearish outlook for the medium-term, and the recent selloff in the exchange rate may gather pace as the relative strength index pushes deeper into oversold territory. Although market participants are trying to pick a short-term bottom on the euro-dollar, we are waiting for the RSI to push back above 30 to see a correction take place, and the pair may threaten the 1.2300 figure later this week as it struggles to find support. For a complete EURUSD outlook and scalp targets, refer to this week's Scalp report.

How To Trade This Event Risk

Expectations for a drop in unemployment instills a bullish outlook for the single currency, and the market reaction may pave the way for a long Euro trade should the development raise the outlook for growth. Therefore, if the print tops forecast, we will need a green, five-minute candle following the release to establish a buy entry on two-lots of EURUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to lock-in our profits.

In contrast, the slowdown in production paired with fears of a prolonged recession may drag on hiring, and a dismal employment report may heighten the bearish sentiment surrounding the single currency as the fundamental outlook for the region turns increasingly bleak. As a result, if we see another unexpected rise in unemployment, we will implement the same setup for a short euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the change in German Unemployment has had on EUR during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
APR 2012	5/2/2012 7:55 GMT	-10K	19K	-16	-24

April 2012 German Unemployment Change

German unemployment unexpectedly increase 19K after contracting a revised 13K in March, while the jobless rate held steady at an annual rate of 6.8% for the fifth consecutive month in April. The EURUSD struggled to hold its ground following the dismal employment report, with the exchange rate falling back below the 1.3150 figure, but we saw the single currency consolidate during the North American trade to end the day at 1.3157.

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Elliott Wave Trade Ideas Performance Update

The long position in EUR/GBP entered in week before was stopped at 0.8035 as the currency pair has remained under pressure last week, price dropped to as low as 0.7964 today and looks set to extend further weakness after breaking the psychological support at 0.8000.

No position was entered in the other currency pairs.

In short, 1 position was squared among the 4 currency pairs last week with a total loss of 45 points and the position is listed below.

 4 May EUR/GBP -  Long at 0.8080, exited at 0.8035   ( -45 points)

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Cut in interest rate also required

THE latest cut in the bank reserve requirement ratio is insufficient to stave off an economic headwind in China and more stimulus policies, including an interest rate cut, are needed to boost the economy, economists said yesterday.

They were responding to the announcement by the People's Bank of China on Saturday that more money will be made available for lending effective from Friday as it cut the amount commercial banks must hold as reserves.

The ratio cut may free about 420 billion yuan (US$67 billion).

The move came on the heels of last Friday's economic data which revealed a surprising drop in bank lending, trading, investment, and domestic consumption. Bank lending in April fell 61.2 billion yuan from a year earlier to 681.8 billion yuan, the lowest so far this year, the PBOC said.

Indeed Premier Wen Jiabao said in April that China needs to prepare "backup plans" in case growth weakens further. For many analysts, the data for April have confirmed further weakening.

"Most of the economic indicators in April are weaker than expected," the Agricultural Bank of China said in a report yesterday. "The central bank may cut interest rate in the second or the third quarter if economy does not pick up."

Other analysts also favored an "asymmetric interest rate cut," referring to an unchanged borrowing rate while the lending rate is cut. 

"We call for an asymmetric interest rate cut to protect economic growth," said Yuan Jiang, an analyst with AgBank.

Sun Lijian, a professor at Fudan University, predicted the PBOC to cut interest rate to help the economy. He argued that another cut in the ratio "cannot be delayed."

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RBA Sees Cut Interest Rate By 50 Basis Points Is A Must To Rebound Growth

Reserve Bank of Australia announced on its 1 st May meeting minutes that cutting the interest rate by 50 basis points is a must during the current environment in order to rebound the underestimated economy's growth.

                              

From another side, Reserve Bank of Australia sees that inflation rates will be between 2% and 3% during the coming couple of years, noting that mining sector has significantly rebounded. Adding that China's economy is still weak.

At the same time, the Australian dollar fell with the release of this data to be traded at 99.56 levels, compared with 99.66 levels before the data, while Australian bonds rose after releasing the meeting minutes. RBA sees employment data will keep moderate during the upcoming period.

Governor Glenn Stevens slashed the overnight cash rate by half percent to 3.75% in order to support exports, house prices and slumped consumer confidence, where Australian four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs.

Australian hose prices fell for a fifth consecutive quarter during the first three months ended in last March, where the demand for housing finance remained weak which pushed on Governor Glenn Stevens and RBA's Monetary policy makers to ease policies in order to support the housing sector wich is strongly related to consumer confidence.

Recently Australia`s economy witnessed a drop in its unemployment rate to a one year low , unlike expectations, as payrolls inclined for the second consecutive month supported by the stronger local currency.

Unemployment rate in April came at 4.9% less than expectations of 5.3%, compared with a previous of 5.2%. Meanwhile, the employment change in April came at 15.5K compared with a previous of 44.0K which was revised to 37.6K, while analysts' expectations were low of -5.0K

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Gold continues falling as Greek deadlock drags on

Gold prices fell in Asian trading on Tuesday as a Greek deadlock over appointing a coalition government entered a new day with no end sight, fanning fears Greece is growing dangerously close to leaving the eurozone.

                             

Fears sent investors favoring the safety of the greenback, which sent gold falling, tracking an embattled euro.
 
On the Comex division of the New York Mercantile Exchange, gold futures for June delivery traded down 0.24% at USD1,557.25 a troy ounce. 

Gold traded at a low of USD1,555.95 a troy ounce and hit a high of USD1,559.35 a troy ounce during the session.

Gold futures were likely to test support at USD1,523.95 a troy ounce, the low from Dec. 29, and resistance at USD1,639.05, the high from May 8.

Greece continued to dominate headlines early Tuesday.

Political leaders remain in a stalemate and unable to patch together a government, stoking fears the standoff will force a new round of elections that could possibly open the door to an eventual exit from the currency zone.

Growing uncertainty has sent anxious investors snapping up dollar positions as a safety play, which has sent the yellow metal tanking.

Gold and the dollar tend to trade inversely from one another.

Elsewhere on the Comex, silver for July delivery was down 0.63% and trading at USD28.173 a troy ounce, while copper for July delivery was up 0.29% and trading at USD3.527 a pound.

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Forex: EUR/USD getting flogged lower; 1.2815 low retested

Price action still looks extremely heavy on the EUR/USD, which has been taken down to recent lows. The short-lived bounces suggests the pair still faces prospects of fresher bearish legs ahead after the first attempt to bursts through this week's descending trendline at 1.2835 has been a crashing failure. The spot rate saw a very timid consolidation at intra-day highs followed by a retest of earlier lows at 1.2815.

                                   

Technically, Chris Capre, Founder at 2nd Skies, do not see downside pressure abating much: "Over the weekend, the EURUSD gapped down and has not even come close to filling it, selling off for now 8+ consecutive 4hr candles. This is quite a lot of consecutive 4hr candles to close bearish and approaching the historical maximum of 10. Could it break this all time max? Certainly, and now would be the most likely time. However, we do not want to chase the trend at this moment and prefer to trade pullbacks."

Thus, as suggested by Chris, his approach is to look for price action pullbacks to the dynamic resistance and 20ema on the 4hr chart which has held price below it since May 2nd: "Unless some silver bullet comes out to save Europe (which we don’t see) or Greece does a 180 and decides to keep the debt-slavery going (I mean austerity package terms), then we expect any and all rallies to be opportunities to sell the pair for an eventual break of 1.2821 and the medium term target of 1.2650 or the 2012 yearly lows" Chris comments.

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USD/CAD - Key Resistance Continues To Hold

The USD/CAD formed a double top on Friday after better-than-expected employment data gave the CAD a boost. However, as risk aversion from the Eurozone pushed up the USD, as well as pressured oil prices, which is correlated to the loonie.

The USD/CAD therefore invalidated the double top patter and rallied back toward last week's high. Last week, the market cracked a key resistance at about 1.0050 and reached 1.0060. To start this week, during the 5/14 US session, the USD/CAD held below 1.0050 again.

Risk sentiment will be key to shaping the USD/CAD's path in the next few days, as most of this month's key US and CAN releases came in the last couple of weeks. There are some US releases like retail sales but its going to be the risk sentiment from those releases that determine the strength of the USD. (USD will gain in risk aversion, fall in risk appetite). The FOMC meeting minutes could be surprise if it brings up QE, but most likely will not in my opinion.

With risk appetite, the USD/CAD has a bearish outlook. The market has the 0.9950 level in sight in the short-term. For now, the bearish outlook is within a ranging market, so the target is limited to the middle of the consolidation range. Note that this is above the 50% retracement and the 200 SMA in the 4H chart, so reaching this level would even be within the context of a developing bullish market.

Risk aversion can continue to boost the USD vs. CAD with a push above 1.0060 opening up 1.0100 as well as opening up the bullish outlook toward the 1.03 handle, and a resistance pivot at 1.0315. Note that in the daily chart, a break above 1.0060 would also clear the 200-day SMA, and provide a bullish signal as well.

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Forex - EUR/SGD, EUR/USD Flows: Eye Greece EUR430m bond payment, EUR/SGD 10-yr lows

Traders talking about reports of key EUR430mln Greek bond payment on international law bond that matures today, May 15 - for those owners who opted out of the Greek-PSI plan. Some talks that a Scandinavian SWF is one of the owners of the bond and a non payment to the non-PSI bond holders could trigger default fears, despite the small amount. Though more likely than not - it could likely be paid. But in event of non-payment - could trigger more fears of default.

                               

On FX, EUR/USD at 1.2833-35, focus on the rising Spanish and Italian yields, and widening of spreads between Spanish/ Italian yields vs German bunds on risk aversion, fears of eurozone contagion. German bunds hit record lows around 1.451%. EUR/USD bids at 1.2800-10, stoploss, options there and more below at 1.2775/1.2750. Real money and good offers at 1.2870-75/ 90-00, with hedge funds and CTAs good sellers. EUR/SGD at 10-year lows around 1.6125-35. Eye break of 1.6100 and then the psychological 1.6000 level. USD/SGD hit 1-month highs of 1.2585, high since April 11 1.2633, on good buying by Germans, Europeans on broad based USD demand, but UK clearers and funds, local banks sellers on rallies. Interest still for lower Cross/SGD - EUR/SGD, AUD/SGD, NZD/SGD - except for GBP/SGD - which is firm due to EUR/GBP sales to 3-half year lows on safe haven flows into UK Gilts. WL

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