Momentum fails to follow through once again

So far today, we're seeing yet another example of momentum from the previous day failing to follow through to the next day, as yesterday's swoon in the EURUSD and other USD crosses fails to maintain a head of steam. USDJPY remains above 80.

The euro remained weak today, even as Euro sovereign spreads moved lower and headlines like “Mario Monti: We Have a Week to Save the Euro Zone” flashed across the screen. This is also interesting in light of the publishing of yesterday’s Spanish stress test results, which showed the need for a further EUR 50 billion+ in the event of an “adverse scenario”. The IFO was released today and did read slightly below expectations, but in my eyes, the index remains astoundingly resilient given the backdrop.

Considering the run-up into the FOMC meeting, it makes some sense to see about of consolidation ahead of the critical EU summit next week as so many questions remain unanswered it’s hard to know where to start. One of the critical keys is the actual approval of the ESM mechanism meant to bail out the Spanish banks, which yesterday the German constitutional court held up by requesting that it not be ratified until the court has had a chance to review it in terms of constitutionality. See the Spiegel’s views on Merkel’s vulnerabilities as we head into next week’s summit here.

It’s worth considering that the solutions that are most likely to “work” for the Euro Zone involve a Euro devaluation, so developments that decrease yields at the periphery from here on out are not necessarily Euro bullish as the most likely way for the Euro and the EU to survive more or less intact is if the politicians and the ECB can finally get together and bringing a devaluation to the periphery. Today, the ECB was up to its usual extend-and-pretend tricks as it announced additional measures to increase the use of collateral.

USDJPY still a big focus
New highs in German yields today and US treasuries also selling off have JPY crosses headed higher, as USDJPY yesterday cleared the 80 level yesterday and survived a test of that support today. It was very interesting to see yesterday’s large scale adjustment in the USD and most risk assets not echoed in the bond market. This is a divergence to keep an eye on in the days ahead.

Canada inflation
CAD was knocked even lower against the USD after yesterday’s swoon on the very low Canadian CPI data, with the YoY headline inflation dropping a full -0.8% to a mere +1.2%, the lowest in almost two years. The core inflation level also dropped slightly more than expected and was close to its lowest level in a year.

Chart: USDCAD
The USDCAD chart is a bit more straightforward than other USD charts as the consolidation has been far more muted. Yesterday’s rally pulled the pair well back into the zone and the stance remains bullish as long as the pair remain above the rising 200-day moving average. Oil prices should perhaps be weighing on the loonie more than they have thus far.#

Looking ahead
Next week is end of month and end of quarter and will also feature the EU summit on Thursday and Friday, so by Friday’s close, we should somewhat of an idea where we stand on the political environment in Europe, unless EU negotiations drag on into the weekend. The most interesting thing for traders is whether this makes the third time in a row that we get a big Euro meltdown after an important event risk that fails to develop into a bigger directional move, or whether yesterday marked the end of three weeks and more of USD consolidation. I’m biased to the downside as long as we remain clear of the 1.2650-or-thereabouts area in the days ahead.

Besides that, what could be more ironic than the spectacle of a Germany-Greece football match tonight?

Economic Data Highlights

• Germany Jun. IFO Survey out at 105.3 vs. 105.6 expected and 106.9 in May
• Italy Jun. Consumer Confidence out at 85.3 vs. 86.0 expected and 86.5 in May
• Canada May Consumer Price Index out at -0.1% MoM and +1.2% YoY vs. +0.1%/+1.5% expected and vs. +2.0% YoY in Apr.
• Canada May Core CPI out at 0.2% MoM and +1.8% YoY vs. +0.3%/+1.9% expected, respectively and vs. +2.1% YoY in Apr.