Theme Of Sell Euro Commodity Crosses To Continue As Risks Strike Back

Just as risk aversion seemed to be back as the main driving force in the markets, US equities staged a strong rebound on Friday on JPMorgan Chase's earning report. The tide was suddenly turned as dollar turned negative against the yen, sterling, Canadian dollar and aussie. Sterling was particularly impressive on safe haven flow from the eurozone and was given a strong boost from strength in financial stocks.

Meanwhile, the euro continued to be the weakest currency together with Swiss franc on the never-ending debt crisis. Indeed, the euro's sell-off against commodity currencies has intensified after the ECB cut deposit rates to zero. Judging from the price actions on Friday, US equities will likely regain strength in the near-term. The aussie should gain most from risk appetite and be followed by the Canadian dollar and sterling. The dollar and yen will probably turn mixed despite last week's rally attempt. The euro could recover a bit against the dollar and yen but strength should continue to be weak. Selling EUR/AUD, EUR/CAD and to a slightly lesser extent EUR/GBP will continue to be the better near-term strategy as price actions could be quite mixed elsewhere.

In the US, the FOMC minutes for June 19-20 meeting was somewhat of a disappointment to investors. There was no lengthy discussion on the options for additional stimulus. Indeed, the Fed just noted that a few members viewed that "further policy stimulus likely would be necessary." Several others said additional policy action could be warranted if "economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee’s longer-run objective." Meanwhile, six policy makers expected the first rate hike in 2015 and it's getting more likely that the low-rate pledge could be extended.

Fitch affirmed US' AAA credit rating but outlook remained negative. Fitch noted that the rating is "underpinned by its highly, diversified and wealthy economy; monetary and exchange rate flexibility; and the exceptional financing flexibility afforded by the global reserve currency status of the U.S. dollar." Also, the agency noted that "fiscal and macroeconomic risks emanating from the financial sector are moderate and diminishing." Fitch expects that the economy will gradually accelerate into 2013 and 2014. And Fitch doesn't expect to "resolve the Negative Outlook until late 2013."

In the eurozone, finance ministers agreed to speed up the bailout for Spanish banks with EUR 30b to be ready for the end of this month. The agreement will be finalized on July 20 after getting approval of member states' parliament. Spain is expected to set up a separate company to manage the assets on the recapitalized banks. The maturity of loans to Spanish banks will average 12.5 years and be eventually taken over by ESM. In addition, Spain will be given an extra year, until 2014, to meet its deficit reduction targets.

Germany's Constitutional Court delayed its decision on the eurozone's permanent bailout fund ESM. It could take months, rather than weeks before reaching a conclusion. ESM is originally expected to replace the temporary bailout fund EFSF in early July, but it couldn't come into operation before German's ratification of the treaty. Moody's downgraded Italy's government debt ratings by two notches to BAA2, down from A3. And, that's just two notches above junk level. The rating agency noted that "Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets."

Also, the "risk of a Greek exit" has risen and "Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized." ECB said that the overnight deposits dropped by more than half to EUR 324.9b, lowest level this year. That's an instant reaction to ECB's decision to cut deposit rate to zero.

BoJ unexpectedly increased the size of the asset purchase program by JPY 5T to JPY 45T. However, the size of the fixed rate loan program was reduced by JPY 5T to JPY 25T. Effectively, the total size of the stimulus program was kept at JPY 70T with just some slight tweaking. The bank also voted unanimously to keep overnight rates unchanged at 0-0.1% range. Regarding inflation, BoJ forecast inflation to rise to 0.7% in the fiscal year starting 2013, that is, it will stay below its 1% target at least through early 2014. Regarding the economy, BoJ lowered GDP growth forecast this fiscal year to 2.2%, down from prior projection of 2.3%. Separately, Bank of Korea lowered its benchmark borrowing rate by 25bps to 3.00%, the first cut since 2009.

China's GDP slowed more than expected to 7.6% yoy in Q2. That's the worst number in three years and compared with Q1's 8.1% yoy. Nonetheless, it's somewhat a relief to markets as the figures was just a touch below expectation of 7.7% and was still above China's 2012 target of 7.5%. Based on the data, the soft-landing scenario is still on track and more monetary and fiscal stimulus would likely be provided to ensure the growth target is met. CPI slowed more than expected to 2.2% yoy in June while PPI dropped more than expected by -2.1% yoy. Trade surplus jumped to a three year high of USD 31.7b in June. However, import rose less than expected by 6.3% yoy only, comparing to market expectation of 11-12%. Export on the other hand, slowed to 11.3% yoy. The data raised concern on the strength of China's domestic demand.