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Spain: looming risk of ‘total’ bailout
Photo: AFP/File - Philippe Huguen
As many analysts have foreseen, the situation in Spain is really becoming more and more heated. There has been a lot of talk about the problems of Spanish banking sector contaminated with toxic loans and assets from the collapse of the country’s property market in 2008.
It turned out that the suspicions haven’t been groundless: independent auditors hired by Spanish government claimed that the nation’s banks could need 62 billion ($78.6 billion) in new capital to protect themselves from economic shocks in the worst-case scenario.
Of course, this sum isn’t striking as European authorizes agreed to lend 100 billion euro to Spanish banks this month, so the financing needs may be fully covered. However, the figure proves that Spanish banks are in trouble. Spain will apply to EU for a bank bailout loan on the basis of the auditors’ report no later than Monday, said the head of Eurogroup Jean-Claude Juncker.
What worries the markets is that Spain’s debt burned will keep mounting. Spanish 2-year bond yields jumped to 4.7% from 2.1% in March. The nation’s 10-year yields reached record 7.285% this week getting above the critical 7% level – other indebted euro zone nations have asked for help at this point. So, the risk that Spain will join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country seems high.
The risk sentiment has turned sour on the news and EUR/USD breached trend line support of $1.2600 yesterday. For now the bears got constrained by 23.6% Fibonacci retracement of euro’s decline in May.
Chart. Daily EUR/USD
Aspen Trading: recommendations for EUR/USD
Aspen Trading Group, one of the leading providers of actionable analysis and trading strategies in the currency markets, recommends going short on EUR/USD at 1.2600 level, targeting at 1.2300 and with a stop at 1.2700.
According to specialists, selling the euro on a pullback is the most appropriate strategy these days, because the seeming improvement of the situation is superficial. Today the newly formed Greek government announced it needs two more years to meet the budget target. The US dollar, on the contrary, is likely to strengthen in the nearest future due to the extension of the Operation Twist.
EUR/USD breached trend line support of $1.2600 yesterday. For now the bears got constrained by 23.6% Fibonacci retracement of euro’s decline in May.
Chart. Daily EUR/USD
SocGen: NZD/JPY may rally
Analysts at Societe Generale propose buying New Zealand versus Japanese yen.
The specialists point out that New Zealand’s fundamentals seem really good: first quarter GDP growth was surprisingly high (+1.1% q/q), May jobs advertisements figures were also quite encouraging. In their view, this is not enough to ensure sustainable kiwi’s growth, but able to make it more attractive than Aussie.
As for Japan, yen has weakened since the Fed’s decision to expand the Operation Twist program which brought shorter-term treasury yields higher. Remember that USD/JPY is correlated with spread between 2-year American and Japanese debt.
Chart. Daily NZD/JPY
Danske Bank: sell EUR/GBP
Analysts at Danske Bank note that the pair EUR/GBP has stabilized today after yesterday’s slide of both euro and pound versus the greenback in the 0.8040 area. The bank says that euro and pound will likely remain under pressure against USD in the coming days.
The specialists recommend selling the single currency versus the greenback on recovery to 0.8112 in the targeting levels in the 0.7989 zone and placing very tight stops.
According to Danske Bank, resistance for EUR/GBP lies at 0.8058, 0.8090, 0.8100 and 0.8112, while support is found at 0.8023, 0.8012, 0.7989 and 0.7971.
Chart. Daily EUR/GBP
USD/JPY: technical levels
The USD/JPY cross strengthens for a third consecutive day after a trade in a downward channel since March until early June. This week the Japanese yen is one of the worst performers among the other key currencies. The reason for the current weakness of the JPY is that the BoJ is expected to expand the asset purchase program at the next policy meeting (July 12).
According to analysts at Credit Suisse, USD/JPY targets growth after a break through a strong 80.00 resistance on Thursday even despite the strongly negative Philly Fed index. Specialists expect the cross to consolidate at current levels for some time, but then to continue upward movement to the 84.00 area. However, if the pair falls below the 78.79 support, a decline to 77.65 will become likely.
Specialists at Societe Generale, however, doubt that the investors, bullish on the yen, will give ground quickly without any weighty reasons (for example, German yields growth or Spain’s yields decline). Today we witness a fierce fight between bulls and bears.
Resistance:
80.56 (May 16 maximum);
80.61 (May 2 maximum);
80.44 (100-day MA);
81.00 (psychological level);
81.07 (38.2% Fibonacci retracement from Jan.-March rally);
81.45 (April 27 maximum).
Support:
80.00 (June 22 minimum);
80.10 (50% Fibonacci retracement);
79.82 (50-day MA);
79.16 (61.8% Fibonacci retracement);
78.79 (200-day MA);
77.65 (June 1 minimum).
Chart. Daily USD/JPY
JPMorgan: SNB’s very exposed to European crisis
Analysts at JPMorgan Chase claim that the euro zone debt crisis may deepen. In their view, this poses risks for EUR/CHF floor set by the Swiss National Bank.
The SNB revealed today that its foreign-exchange reserves rose to 70% of GDP. When the central bank abandoned its previous currency-intervention policy in May 2010, the reserves accounted for 56% of GDP.
This means that the SNB is now extremely vulnerable to euro’s depreciation versus the greenback. “The merits of accruing so much exposure to the euro will look increasingly suspect if the sovereign crisis intensifies and euro-dollar collapses in a high-volatility fashion, thus anchoring Swiss monetary policy to an imploding asset,” says JPMorgan Chase.
SNB’s Danthine said today that franc’s ceiling is “absolutely necessary” and cap could be maintained for a “rather long-time”.
EUR/CHF keeps its monotonous crawling just above 1.2000.
Chart. H4 EUR/CHF
Monday, June 25: economy and currencies
EUR/USD weakens on Monday ahead of the Italy’s and Spain’s debt auctions scheduled on Tuesday. Spain is to sell 3- and 6-month bills tomorrow, while Italy will auction inflation-linked securities maturing in 2016 and 2026, as well as up to 3 billion euro in zero-coupon bonds. At the end of the last week Spain’s bond yields declined to 6.38% after overcoming the critical 7% level. Investors fear that the euro zone’s crisis will contaminate bigger economies. The EU leaders meeting in Brussels on June 28-29 is likely to become one of the most important events of the week: politicians will discuss measures towards a regional banking union, tight fiscal integration and the possibility of a debt redemption.
The MSCI Asia Pacific Index (MXAP) of shares slid 0.3%: the market switched into a risk-off mode with an increased demand for safe-havens. AUD/USD and NZD/USD fell on speculation the euro zone’s borrowing costs will continue to grow. USD/JPY demonstrates a downward movement after three days of a consecutive growth.
Event to watch today: the US new home sales in May are expected to climb to 347K from 343K in April.
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2500, $1.2580, $1.2650, $1.2700;
USD/JPY: 79.00, 79.50, 80.25, 80.35, 80.50;
GBP/USD: $1.5600, $1.5800;
AUD/USD: $0.9850, $0.9965, $1.0030, $1.0200;
USD/CAD: 1.0110.
CFTC traders positioning data
The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that during the week to June 19 speculators’ positioning changed the following way:
EUR: the net short positions decreased to 141K contracts from the previous week’s total of 195K contracts on June 12th. The speculator sentiment towards the single currency improved last week: the shorts reached their minimum since May 1.
GBP: the net short positions went down to 17K contracts following a total of 23K contracts the previous week. Sterling positions improved last week for the first time in six weeks.
JPY: the net long yen positions totaled 15K contracts following a total of 12.3K contracts on June 12th. Yen's positions remain positive on the long side for three consecutive weeks.
CHF: the net short positions declined to 7K contracts following a total of 33.3K contracts (the best showing since December 2011).
Data from CFTC
CFTC traders positioning data
The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that during the week to June 19 speculators’ positioning changed the following way:
CAD: the net long positions fell to a total of 8.2K contracts from a previous week's total of 9.6K contracts (the lowest level since Feb. 6).
AUD: the net short positions shrank to a total amount of 3.5K contracts from 45.5K contracts.
NZD: the net short positions declined to a total of 2K contracts following a total of 3.8K contracts on June 12th.
USD: the value of the net long positions fell to $22.13 billion on June 19th from a total of $38.77 billion on June 12th.
It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound. Although the CME speculators represent a small fraction of trading in the currency markets, their trades are widely seen as typical of hedge fund investors' currency movements.
Data from CFTC