Daily Foreign Exchange News Brought to you by SendMoneyHome - 27/07/2010

July 27, 2010 - PRLog -- Market introduction by Stuart May

Good afternoon, as a result of a number of positive indicators, there has been a shift away from the lower yielding such as the yen and dollar towards their higher yielding counterparts like the pound and the euro. European stress tests were obviously included in these indicators, as well as strong preliminary GDP results for Q2. In the US, sales of new homes were up 24% which only increased risk appetite for high yielding currencies as investors are more confident in recovery. Moneycorp, TorFX, and Currencies Direct provide the market highlights today.

As I continue to circulate my daily currency market reports, I have realised that there is a lot of technical jargon being included in our market reports by our specialists and myself. I have therefore written a short passage entitled ‘Understanding the Currency Markets’ to explain some of the more technical areas that are discussed in the market. It is available on the SendMoneyHome website below the currency rates themselves:

http://www.sendmoneyhome.org/foreign-currency-articles/ex...

Moneycorp

Majority approves the stress tests

There has been considerably less outrage over the stress tests carried out by European banks, despite surprisingly generous hypotheses for some respondents. Apparently the 'worst case' scenario for Greek banks was a 2% fall in house prices. Austrian banks did not even have to consider a property slump; their doomsday scenario involved a 2.7% price rise. The most stringent tests seem to have been those for Spanish banks, who had to model a 28% fall in house prices and a 61% decline in land valuations. Interesting, then, that it was the regional Spanish banks who came off worst and that the Austrians all passed.

Nevertheless, as observed, the test results have done the euro more good than harm. It has not strengthened a great deal since the announcement on Friday evening but it is about a cent and a half better against the US dollar, a cent higher against the Swiss franc and half a cent firmer against the pound. No cigar, then, but nor has it any reason for embarrassment.

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Voltrex

US Dollar:
Traders are at present willing to take on more risk now the bank stress tests are out of the way, and more earnings report due this week. The dollar has nosedived as players dump the safe haven greenback and purchase more riskier assets, moving the euro and pound higher against the greenback. Q2 results for banks (UBS and DB next up) will dictate the mood. Wall Street futures are edging lower Tuesday after markets gained on Monday as housing data enthused investors. The closing level for the S + P was particularly important as it’s signalled a move above the 200-day moving average—a sign many bulls have been advocating as a catalysts for fresh money to come into the market.

Pound: Sterling has continued its impressive rally against the greenback as European currencies benefit from a selloff in the safe haven currencies such as the dollar and yen. The $1.55 level has been broken and a five month high of $1.5528 was posted this morning, although cable has dipped down slightly since then. We are seeing risk appetite remain buoyant still as global equity markets traded higher on renewed optimism. Against the euro there was a slight move lower as traders moved back into the single currency, which did lose more ground against its rival currencies compared to the pound. We have seen sideways trading against the euro this morning.

Euro: The euro continues to gain, though at a slower pace, after risk appetite picked up once the bank stress tests came out. Concerns that the tests might have lacked enough rigor appeared to subside, while positive economic data from the US and Europe supported riskier assets, buoying the euro an impressive cent gain over its US counterpart to trade above the $1.30 level. Against sterling it was a case of as you were as both currencies benefitted from a gain in risk appetite. Investors who had been nervous over the eurozone sovereign debt crises dipped back into the euro. Publication of the tests brought many critics to the fore.

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TorFX

The Pound took advantage of broad Dollar weakness yesterday, rising to the highest level in three months in London, after UK banks sailed through the European bank stress test. The UK currency has continued through $1.55 for the first time since April 16th, after the FSA said on Friday afternoon that HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Plc all passed tests that were designed to show their ability to withstand further economic turmoil.

The Pound rallied against the lower-yielding currencies like the Dollar and the Yen, as the FTSE 350 Banks Index gained and the UK currency also withstood a cut in the UK economic growth forecast from the Ernst & Young LLP Item Club. There have been some suggestions that the surprising acceleration in UK gross domestic product in the second quarter will mark the peak of the economic recovery. On Friday, the preliminary estimate of GDP in the three months to June rose 1.1%, almost double the expectations of 0.6% growth.

The Pound rallied towards the pivotal 1.20 level against the Euro on Friday, prior to the release of the stress test results at 5pm, while choppy trading conditions towards the close of the European session saw the UK currency close just under the level. The Euro continued to rally against the Dollar yesterday approaching $1.30 by midday, as only seven out of the 91 banks tested failed and speculation persists that the U.S economy may suffer a "double dip" this year.

The Euro continued to rally against the majority of the 16 most actively traded currencies yesterday, amid speculation that European banks will be able to avoid defaults, after only 7 out of the 91 banks failed the stress test.

The U.S economic data released yesterday boosted risk appetite, after the sales of new homes rose unexpectedly in June, following an unprecedented collapse the previous month. New home purchases increased 24% from May to an annual pace of 330,000, a signal that the worst of the slump came about due to the end of a government tax credit.

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Currencies Direct

One fifth of the 7.66 trillion yuan (1.1 trillion dollars) that Chinese banks lent to local governments is "at serious risk of default", is the latest potential default risk problem to halt the global recovery. Chinese banks lent vast sums of capital to local Chinese governments for construction projects after Beijing called for nationwide efforts to stimulate the economy. However, only one quarter of projects financed by the loans have the ability to meet repayments, according to the Century Weekly.
Following much hype and media coverage, the European bank stress tests were released on July 23, after European markets had closed, and met a subdued U.S. market reaction which was rather more interested in the immediate and clear positive stock price effects of a takeover offer for Genzyme.
The euro briefly traded above 1.30 against the dollar overnight. A combination of growing confidence in Europe's economy buoyed by Deutsche Bank's impressive results, a bigger than forecast increase in US new home sales in June and a boost in FedEx corporate earnings prospects made riskier assets more attractive. US new home sales were up 23.6% in June, well up on expectations and a sharp rebound against a drop in May of 36.7%.
The pound hit a five month high against the dollar after an improved tone boosted by the stress tests combined with last Fridays better than expected GDP figures gives a more upbeat outlook for the UK economy and currently trading at GBPUSD1.5452 and GBPEUR1.1893. Today sees the release of the CBI distributive trades survey for July.

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