Fundamental Headlines

- Greek President Told Banks Anxious as Deposits Pulled – Bloomberg

- Merkel-Hollande Meeting Yields Greece Growth Signal – Bloomberg

- BoE Cites Increased Risk of Disorderly Euro Outcome – DailyFX

- Hedge or Bet? Parsing the JPMorgan Trade – WSJ

- Mortgage Delinquencies Decline – WSJ

European Session Summary

After Greek leaders announced that they failed to form a government, guaranteeing at least one more round of elections, higher yielding currencies and risk-correlated assets entered a free fall. The EURUSD fell to its lowest level since January 17 overnight while the AUDUSD dropped to its lowest level since December 15. Similarly, global equity markets have sold off sharply in the aftermath, with Asian shares being hit the hardest.

With a weak start to the London trading session, it appears that today could have been a day of panic. It was not, however, with the majors setting their lows against the US Dollar by 08:00 GMT, leading to a modest rally – profit taking, it appears. Before this rally, however, and as the Australian Dollar and the Euro set fresh May lows, pressure in the bond market reached distressing levels unseen the height of the crisis last fall.

The major headlines from last night, of note: Italian 10-year bond yield rises above 6 percent for first time since January 31; Spanish 10-year bond yield reaches 6.5 percent for first time since November 29; and the Spanish-German 10-year spread widens to 500-basis points for first time since November 18; and German 10-year government bond auction draws record low yield. These are not the headlines that suggest another bull run is around the corner; but rather to ‘hoard cash and hide.’

Post-US cash equity open today more of these headlines came across the wires, with the European Central Bank announcing that it would not change its policy outlook, a sign that another longer-term refinancing operation (LTRO) is all but a dream at this point. Perhaps more important was the decision that the ECB was ceasing its monetary operations with four Greek banks due to recapitalization issues (UPDATE: Deutsche Bank notes this is a “non-event for the top-4” as the ECB’s decision does not affect the four systemic banks, Alpha Bank, Eurobank EFG, NBG, or Piraeus Bank). Regardless, the rally stoked this morning has fallen flat and higher yielding currencies and risk-correlated assets are under pressure in the closing minutes of European trade.

Taking a look at credit, periphery bond yields have fallen back from this morning’s highs, with the Italian and Spanish 10-year bond yields dropping to 5.802 percent and 6.243 percent, respectively. The German 10-year Bund continues to hover near its all-time low yield (high in price) at 1.455 percent, trading at 1.467 percent at the time this report was written.

AUDUSD 5-min Chart: May 16, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Despite the ECB news, the Euro has been the top performer today, gaining a mere 0.16 percent against the US Dollar thus far on Wednesday. The New Zealand Dollar has been the worst performer, with the NZDUSD shedding 0.39 percent. After setting new lows and then trading above today’s opening range, the AUDUSD is relatively unchanged, down 0.02 percent.

24-Hour Price Action

Key Levels: 16:30 GMT

Thus far, on Wednesday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 10104.40 at the time this report was written, after opening at 1010097.91. The index has traded mostly higher, with the high at 100133.07 and the low at 10096.82.

Despite all of this progress, it is possible that that we have another spurt of volatility after Europe has closed, with the Federal Open Market Committee April 24 to 25 meeting minutes scheduled to be released today at 18:00 GMT. Considering the tone that Chairman Ben Bernanke took at the press conference following the meeting, Currency Analyst David Song notes that “a dovish statement could spark a short-term correction in the USD, and the dollar may consolidate going into the end of the week as the rally from the beginning of the month remains overbought.”

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line “Distribution List” to cvecchio@dailyfx.com

Gold and silver continued their downward trend during yesterday’s trading despite the slightly positive news of the higher than expected growth rate of Germany’s GDP in the Q1 2012 (a growth rate of 0.5%); the news of the new elections in Greece to be held in June raised the anxiety in the markets and dragged down the Euro. This news may continue to affect the forex and commodities markets in the days to follow. As stated in the weekly gold outlook there are many items on today’s agenda: the minutes of April FOMC meeting, U.S housing starts report, ECB President speaks, Euro Area Annual Inflation and BOE Inflation Report .

Gold slipped again on Tuesday by 0.25% to $1,557.1; silver also declined by 0.96% to $28.08. During the month gold fell by 6.44% and silver by 9.47%.

On Today’s Agenda

Minutes of April FOMC Meeting: Following the recent FOMC meeting, in which it was decided to keep the monetary policy unchanged, the market didn’t react to this news as metals only slightly rose. The minutes of the FOMC meeting might offer some insight behind this decision regarding the future steps of the FOMC;

U.S. Housing Starts: the housing starts figures were historically correlated with gold– as housing starts declined, gold tended to increase the following day; in the previous report, the adjusted annual rate declined by 5.8% (M-O-M) to 654,000 in March;

Forex / Bullion– May Update

The Euro/USD declined again on Tuesday by 0.73% to 1.2729 – the lowest level since January 2012. As indicated below the correlation between gold and Euro/USD slightly fell in recent weeks but is still mid-strong (currently it stands at 0.33). Nevertheless, since these currencies pairs are still strongly and positively correlated with metals, as the USD continues to appreciate against the Euro, bullion may continue to be adversely affected from this trend.

Daily Outlook

I speculate bullion will continue their downward trend during today’s trading. The upcoming reports from the U.S may curb this downward trend if the housing starts will continue to fall and if the FOMC minutes might reveal some more hints of a potential monetary expansion is in the horizon (I suspect low chances for this in the near future). The political developments in the Euro Area mainly Greece may keep the anxiety levels in the financial markets high so that the Euro might continue its weakness against the USD; this Greek news may also drag along with it commodities.

This gold and silver prices forecast was first presents in Trading NRG

For further reading:

Weekly Outlook for May 14-18 2012

Gold and Silver Weekly Outlook for May 14-18

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

Talking Points

• British Pound: BoE Curbs Growth, Inflation Forecast – 1.5800 In Sight
• Euro: Eyes 23.6% Fib For Support, IMF Strikes Cautious Tone For Italy
• U.S. Dollar: Index Approaches December High, FOMC Minutes In Focus

British Pound: BoE Curbs Growth, Inflation Forecast – 1.5800 In Sight

The British Pound tumbled to a fresh monthly low of 1.5888 as the Bank of England kept the door open to expand monetary policy further, and the sterling may face additional headwinds over the near-term as the spillover effects from the sovereign debt crisis dampens the outlook for the region. Indeed, the BoE curbed its growth forecast and saw a risk of undershooting the 2% target on the back of subdued wage growth, but went onto say that the ‘big picture’ has not changed from February as policy makers expect to see a gradual recovery in Britain.

At the same time, the central bank warned of a disorderly outcome in the euro-area as the governments operating under the single-currency struggle to meet on common ground, and it seems as though the Monetary Policy Committee will carry its wait-and-see approach into the second-half of the year in an effort to shield the U.K. economy. Nevertheless, the BoE continued to highlight the stickiness in price growth as they see inflation staying above target through 2013, and it may become increasingly difficult for the central bank to defend its stance as underlying price pressures resurface. As the GBPUSD fails to maintain the upward trending channel from earlier this year, we expect to see a test of the 1.5800 figure for support, and the pair may trade sideways ahead of the BoE Minutes due out next week as market participants weigh the prospects for monetary policy.

Euro: Eyes 23.6% Fib For Support, IMF Strikes Cautious Tone For Italy

The Euro snapped back from an overnight low of 1.2680 amid the rebound in risk sentiment, but the single currency may face additional headwinds going into the end of the week as heightening finance costs across the region raise the risk for contagion. Indeed, the yield tied to Italy’s 10-Year debt breached 6% while the 10-year spread between Spain and German bonds widened to 500bp for the first time since November, and the ongoing turmoil in the region continues to cast a bearish outlook for the EURUSD as European policy makers struggle to restore investor confidence. In response, the International Monetary Fund argued that ‘a lot remains to be done’ in Italy as the group sees the region contracting in 2012, and the European Central Bank may come under increased pressure to expand monetary policy further as the region continues to face a risk for a prolonged recession. As we expect the ECB to carry its easing cycle into the second-half of the year, we will preserve our bearish outlook for the EURUSD, but the pair looks poised for a short-term correction as the recent decline remains oversold. As the euro-dollar comes up against the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, we may see the figure provide interim support, but we will need to see the relative strength index cross back above 30 to see a meaningful rebound in the exchange rate.

U.S. Dollar: Index Approaches December High, FOMC Minutes In Focus

The greenback continued to gain ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh monthly high of 10,100, but we’re seeing the reserve currency consolidate ahead of the FOMC Minutes as market participants weigh the prospects for monetary policy. As Fed officials take note of the more robust recovery paired with the stickiness in price growth, the central bank may sound more hawkish this time around, and we may see the committee continue to talk down speculation for another large-scale asset purchase program as the world’s largest economy gets on a more sustainable path. However, we may see Fed Chairman Ben Bernanke keep the door open to expand monetary policy further as the sovereign debt crisis continues to pose a threat to the global financial system, and we may see the central bank head renew expectations for additional monetary support as Mr. Bernanke continues to highlight the ongoing weakness in the private sector. In turn, a dovish statement could spark a short-term correction in the USD, and the dollar may consolidate going into the end of the week as the rally from the beginning of the month remains overbought.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

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