USD/JPY drops below 90.00 in early Asia but bounces to 90.30 in European trade
AUD/USD rises to .8360 as Chinese equities rally
GBP/USD can't hold 1.4500 in choppy trade
EUR/USD 1.2500 gives way in early European trade with 1.2450 support threatened
A mild risk rally in Asian session spurred by a 3% gain in the Shanghai index quickly evaporated by the time European dealing began with EUR/USD falling through short term support at 1.2450 by mid morning trade. Risk FX rallied into the Asian close as Chinese stocks rose on speculation that the PBOC will no longer maintain a tightening posture given the turbulence in the capital markets over the past several weeks.
As we noted earlier, "Traders now believe that the turmoil caused by the European sovereign debt crisis will force Chinese monetary policy makers to become more accommodative in order to maintain growth in H2 of 2010 given the likely slowdown in growth in Europe - China's largest export market. The events of the past month have greatly reduced chances of yuan revaluation anytime soon, as the unit which is pegged to the dollar has appreciated nearly 15% against the euro. Indeed there was some speculation in the market that the PBOC may have tried to slow down euro's decline in last week's massive selloff as Chinese monetary officials grow more concerned about the adverse exchange rate differentials."
Still the euro remains pressured on sovereign debt concerns as last week's short covering rally runs out of steam. Over the week-end the Bank of Spain had to shut down a failed savings bank CajaSur which has been run by the Roman Catholic church for more than 146 years. The pair broke below 1.2450 , its first line of support and could try to retest the 1.2200-1.2300 level as the week progresses and the shorts press their case once again. With very little European data on the docket this week, flows are likely to be driven by official commentary and equity movements. We continue to believe that the EUR/USD will remain rangebound as markets digest the recent moves and volatility starts to compress. Nevertheless, sovereign debt fears remain just below the surface and a break of the recent lows at 1.2120 will very likely trigger a move to test the stops at 1.2000.
For the rest of the day trading is likely to subdued with key European money centers closed for a bank holiday. In North America the only event risk on the calendar is Existing Home sales which are forecast to rise to 5.62M units from 5.35M the period prior. If the data doe s surprise to the upside it may provide some support to US equities and reverse the risk aversion flows from Europe. For now 1.2400 remains the next support level for the EUR/USD with 1.2500 capping the upside as range continues to be the dominant trade for the day.
FX Upcoming
Currency GMT EST Release Expected Prior
USD 14:00 10:00 USD Existing Home Sales 5.61M 5.35M
