Afternoon Run … June 7, 2010

Key News

* UK Cameron: Govt To Lay Out Plans For Spending Review   (WSJ)

* G20 communique after meeting in South Korea (Reuters)

* ECB’s Trichet: Euro is a ‘Credible,’ ‘Solid’ Currency (Market News Int’l)

* Hungary Aims to Calm Fear on Debt  (WSJ)

Afternoon Run-Down

The euro’s breach of the 1.21 area on Friday has set the tone for currencies and global financial markets.  With a little help from the publicly exposed problems in Hungary and weaker U.S. employment data on Friday, the euro, on its fifth attempt, finally sliced through 1.21. 

Last week I noted the recent stability of the euro under the 1.22 area.  As suspected it was “official” interest.  China and Bank of International Settlements were among the buyers in that area acting to slow the pace of decline in the euro.

The breach of that significant zone in the euro was a signal for more risk aversion … i.e. across the board selling of global stocks, commodities and currencies – and more strength in the dollar and U.S. treasuries safe havens.

Expect coordinated efforts at levels along the way to keep the decline in the euro orderly.

Also, overnight, the euro slid further on reports that German courts were weighing imposing interim order against Germany’s participation in the 750 euro package.  The move of “solidarity” as a desperate attempt to stabilize the ugly state of the monetary union is a recipe for political fireworks—expect more to come. 

Another market moving issue last week for currencies was the resignation of the Japanese Prime Minister.  That’s four Prime Minister’s in four years.  And given the recent Japanese Finance Minister is the replacement … that makes eight Finance Ministers in four years.  As with the public trashing of economic prospects from Hungarian officials last week, this is not the market environment to talk openly about the calamitous state of your economy, nor is it the environment for introducing more political uncertainty – read Europe, the UK and Japan.

Financial markets are roiled as a result.

We have three central bank meetings this week: Reserve Bank of New Zealand (RBNZ), the Bank of England (BOE) and the European Central Bank (ECB).  The market is pricing in a high probability of a first tightening out of New Zealand. 

As a result, the kiwi has enjoyed some relative strength in the past week.  Expect a hike to be met with subdued interest, but a surprise “no change” on rates to fuel big selling in the NZD.  This afternoon’s sell-off in the kiwi suggests the market is pricing out expectations of a rate hike.   

The ECB, which has been in exit mode from its “emergency policies” will likely show bias toward more extraordinary stimulus (loan provisions) on Thursday.  As for the BOE, while hotter inflation data has prompted speculation of some tightening steps to come, tighter fiscal policy in the pipeline and the deteriorating global environment will keep the BOE standing pat.

Here’s a look at the charts …

Key Charts

 Euro

On Friday the stability protection team finally backed away from the $1.21 zone and the euro broke to new four year lows.  The next support is the November 2005 low of 1.1640. 

Aussie Dollar

A long term chart of the Aussie dollar shows a potential C wave, which projects a move down to the low .70s – another 14% lower.

New Zealand Dollar

…the New Zealand dollar has a similar corrective ABC Elliott Wave structure developing on the daily chart.  A surprise “no change” on rates out of New Zealand on Wednesday night could take the kiwi down to the 60 cent level.

Global Risk Gauges

Credit default swap markets and sovereign debt spreads have are back on the rise. 

S&P 500

The Monday close in U.S. stocks was the lowest close since November of 2009.  Fibonacci support of the retracement from the November highs to the March 2009 Lows come in at:  1008 (38.2% retracement),943 (50% retracement) and then 878 (61.8% retracement).