Euro Firms After Spanish Bond Auctions as RBA Lifts Australian Dollar

The Australian Dollar is the top performer on a quiet Tuesday thus far, in which price action has been skewed in favor of high beta currencies and risk-correlated assets. The Reserve Bank of Australia's Minutes from the July meeting proved to be more optimistic than market participants expected, prompting investors to pare back rate hike expectations. In Europe, data continued to trend lower, with the most recent ZEW Surveys showing the weakest readings of German sentiment since the beginning of the year.

However, the most important news of the day has to be the very promising Spanish bond auction at 04:45 EDT / 08:45 GMT. Spain sold 12-month bills at a yield of 3.918%, which is a dramatic improvement over the auction on June 19, when 12-month bills fetched a yield of 5.074%. Similarly, 18-month bills fielded an average yield of 4.242% versus 5.107% at the June 19 auction. Despite these developments, there has not been much improvement in European periphery debt. The Italian 2-year note yield has pulled back slightly to 3.599% (-2.4-bps) while the Spanish 2-year note yield has risen to 4.656% (+15.9-bps). Similarly, the Italian 10-year note yield has increased to 6.099% (+1.8-bps) while the Spanish 10-year note yield has risen to 6.787% (+5.7-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:43 GMT

AUD: +0.39%

CHF: +0.17%

EUR: +0.17%

NZD: +0.06%

GBP:+0.02%

CAD: -0.01%

JPY: -0.18%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.08%(-0.62% past 5-days)

ECONOMIC CALENDAR

There are three key pieces of data left on the docket today. At 08:30 EDT / 12:30 GMT, the USD Consumer Price Index for June is expected to show that price pressures continued to subside in the US. At the same time, the Bank of Canada will announce its monetary policy for the weeks going forward, and we suspect they will issue concern over the rapidly expanding housing market. Federal Reserve Chairman Ben Bernanke is due to speak in front of Congress at 10:00 EDT / 14:00 GMT, when he issues his Semi-Annual Monetary Policy report. We do not believe he will announce any new measures or insist that the Fed will do more to help the US economy, instead placing that burden on US fiscal authorities.

TECHNICAL OUTLOOK

EURUSD: Short-term technical stress has been relieved following Friday's rally off of the fresh yearly lows set at 1.2161. We remain bearish as the EURUSD has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875. Near-term resistance comes in at 1.2285/90 and 1.2360/65. Above that, interest lies 1.2400, and the crucial 1.2440/80 zone (Symmetrical Triangle support). Support comes in at 1.2250/60, the 1.2155/65 zone then 1.2120/25 (Bollinger Band).

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 79.00/05 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.

GBPUSD: The pair has fought back to its 50-DMA today but has yet to make any sustainable progress above said level at 1.5640/45. With new monthly lows set last week at 1.5390/95, we suspect the trend is lower in the near-term. However, the daily close yesterday above 1.5580 suggests that we could see further upside in the GBPUSD. Near-term support comes in at 1.5460/65 then 1.5390/1.5405 (monthly low, Bollinger Band).

AUDUSD: The pair has leaked lower thus far on Monday, failing once again at the 100-DMA. Near-term resistance comes in at 1.0280/85 and 1.0325/30. A 4-hour close above 1.0325/30 suggests further upside towards 1.0385. Support now comes in at 1.0135/55, 1.0095/1.0105, 1.0080 (former intraday swing highs), and 1.0005/10 (50-DMA).

--- Written by Christopher Vecchio, Currency Analyst

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