Falling Spanish Yields Pave Way for Rally Against US Dollar Ahead of Fed

Little market moving data in the overnight alongside few headlines out of Europe has paved the way for a positive risk landscape thus far on Wednesday. Spanish Prime Minister Mariano Rajoy's new budget, which includes tax hikes that he campaigned against, has also spurred the rally to high beta currencies and risk-correlated assets, as the struggling Southern European country tries to rein in its deficit. Although the austerity measures will most likely necessitate a full-scale bailout of the country in the coming months, for now, this is viewed as a positive development.

Perhaps part of the rally is predicated on the hope that Spain will in fact need a bailout: market participants have shown increasing willingness to shed safer assets once liquidity injections are announced; and more austerity measures will necessitate a bailout in the future. Nonetheless, bond markets have taken today's developments in stride, as yields have fallen back. The Italian 2-year note yield has dipped to 3.748% (-11.5-bps) while the Spanish 2-year note yield has slid to 4.570% (-2.8-bps). Similarly, the Italian 10-year note yield has fallen to 5.866% (-5.6-bps) while the Spanish 10-year note yield has dropped to 6.688% (-4.6-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:32 GMT

AUD: +0.66%

NZD: +0.50%

CAD: +0.34%

GBP: +0.29%

EUR:+0.26%

CHF: +0.25%

JPY: +0.18%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.34%(+0.32% past 5-days)

ECONOMIC CALENDAR

Although the docket is thin during the US session, there are two events of considerable interest that remain. At 08:30 EDT / 12:30 GMT, the US Trade Balance for May is due, and despite the US Dollar's immense strength during the month, it appears that the deficit narrowed; this would suggest that US exports are competitive despite a pricing disadvantage (a bullish implication for the US economy). Speaking of the US economy, the Federal Reserve's Minutes from the June 20 to 21 meeting will be released later at 14:00 EDT / 18:00 GMT; if the Minutes are in line with the policy decision, in which the Federal Open Market Committee opted for a continuation of Operation Twist rather than a full-scale bond purchase program (as expected), the US Dollar should strengthen in the coming days.

TECHNICAL OUTLOOK

EURUSD: The pair has started to rebound as expected as short-term oversold conditions have provided the necessity for some relief. The EURUSD rally should be capped in the near-term, with resistance overhead at 1.2285/90, 1.2360/65, 1.2400, and the crucial 1.2440/80 zone (Symmetrical Triangle support). Support comes in 1.2270/75 and 1.2230/35. at Given the measured move and Fibonacci extensions, we are looking for a move towards 1.1695-1.1875 over the next eight-weeks.

USDJPY: The USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low, with the neckline coming in at 80.60/70. Only a daily close above this level will signal the commencement of this pattern. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term support comes in at 78.85/90 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.

GBPUSD: Oversold technical conditions are being relieved and the pair has started to trade above some near-term resistance at 1.5540/45, originally noted yesterday. More important resistance comes in at 1.5600/05 (20-DMA) then the monthly high at 1.5720/25. Near-term support comes in at 1.5460 then 1.5420/25 (Bollinger Band).

AUDUSD: The pair settled back below the crucial 1.0250/60 area (100-DMA, 200-DMA) yesterday but is now trading back above said levels as the US Dollar has weakened. Still, with last week's range broken to the downside, we necessarily look lower. Near-term resistance comes in at 1.0250/60 and 1.0325/30 (monthly high); a break above 1.0325/30 would signal a reversal and point to more gains towards 1.0365/85. Support now comes in at 1.0120/25 (20-DMA), 1.0080 (former intraday swing highs), and 1.0005/10 (50-DMA).

--- Written by Christopher Vecchio, Currency Analyst

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