Snow back on the back of China….

Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow testified on Thursday on U.S.- China economic relations before the U.S. Senate Finance Committee.

During the testimony, Greenspan said China ought to adopt a more flexible currency regime for the sake of its own economic stability and for the sake of "all participants in the global trading system." He urged the Chinese government to act speedily to alter the fixed exchange rate system it has had for the last decade, saying "the sooner...the better."

U.S. Treasury Secretary John Snow then joined the debate, adding that China must introduce a more flexible currency system and open its economy to more imports in order to head off a dangerous wave of trade protectionism around the world.

"Nothing would do more damage to the prospects of increasing living standards throughout the world than efforts to inhibit the flow of trade," Snow said. "However, it is incumbent on China to address concerns before mounting pressures worldwide to restrict trade harm the openness of the international trading system."

As traders took the time to dissect the testimony, Euro negativity continued as the dominant theme in the market, and the Dollar was further boosted from new jobless claims and housing data suggesting moderate U.S. job growth, and a continuing solid demand in the housing market.
Overnight key support in the EUR/ USD at 1.2000 has been breached, but a sharp correction this morning seems to have pared Euro losses for now….watch this space.

Data for the day starts with the pick of the week in the form of May US Durable Goods Orders (1:30pm BST). Expect moderate growth of 0.7% for the month, with ex-transportation a bit lower at 0.6%. Categories like primary metals, machinery and computers should show decent gains.

And finally for the week….3pm sees the US New Home Sales release. Look for a slight dip after Aprils record 1316K to 1250K, as the Beige book points to a slight slowdown in the upper end housing of Richmond, New York and Cleveland Districts.

Euro struggles to find its base

Expectations that the European Central Bank may lower interest rates in the lackluster euro-zone economy kept the single currency weak against its U.S. rival during yesterdays trading.

Those expectations strengthened after the minutes of the Bank of England's last policy meeting showed that two of its nine voting members called for a rate cut from the current 4.75%. That combined with the Swedish central bank's unexpected half-percentage-point rate cut on Tuesday fed sentiment that Europe as a whole may be in monetary-easing mode.

Sterling understandably took a healthy swipe from the news, as the doves argued that with the outlook for UK consumer spending deteriorating, not acting quickly to cut interest rates would run the risk of an entrenched downturn. This impacted across the curve, and sent yield hunters scurrying.

In other news the dollar fell against the yen in Asia Thursday as traders bought yen on the view that top U.S. officials later today will put more pressure on China for a stronger yuan, which may eventually help persuade Beijing to change its exchange rate policy.

Some overseas hedge funds, U.S. investment banks and Japanese banks pushed the dollar down a third of a yen to an intraday low of Y108.54, although buying by some Japanese importers later helped the greenback pare some of its losses.

Speculators were betting that Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan may both urge China to take the yuan off of its dollar-peg of around CNY8.28 when they testify in Congress today about their country's economic relations with China.

Speculation over a yuan appreciation tends to spark yen buying as investors use the Japanese currency as a proxy for the non-tradable Chinese unit.

Data for the day begins in the UK with the June release of CBI Industrial Trends (11am). Look for a recovery to +5% off –1% last month, but bear in mind this is still well off the +22% peak a year ago, and consistent with output stagnating.

Next up at 1:30pm we have the US weekly jobless claims release. This is forecast for 340k off 333k last time out as early auto shutdowns boost the weekly reading.

Finally for the day at 3pm we have the US existing home sales release. Look for a slight dip from last months record 7.18bn to 7.05bn as the latest Beige book noted some signs of easing demand in the high end housing markets.

Swedish cut signals another dark day for the euro

The Swedish central bank has slashed its benchmark interest rate by 50 basis points to a record low 1.50%, and didn't rule out the possibility of further reductions down the road.

The aggressive moved is seen by many market watchers as playing a trailblazer for the European Central Bank as the euro-zone economy continues to stumble.

As markets digested the prospect of more public pressure on the ECB, the euro dropped to $1.2070 after the announcement from $1.2150 before the news.

The Riksbank, amid intense public pressure to stimulate jobs growth, also dropped its forecast for 2005 economic growth to 1.9% from its previous forecast for 3.2% growth. The sharp revision came after first quarter gross domestic product came in unexpectedly weak at a 1.4% annual growth rate, a result that stripped away the Riksbank's principal argument against monetary stimulus.

A sizable interest rate cut like this is an important hint for the ECB, as all across Europe economies are facing the same structural problem of a high labour cost.

European credit markets were quick to price in a possible ECB rate cut by the end of the year, sending prices for German government bonds soaring.

Further euro woes came from Welfare Minister Roberto Maroni, as he suggested that Italy should hold a referendum to decide whether to bring back the lira. Maroni is a member of the Northern League, a right-wing party that made its political mark in the 1990s calling for Italy's northern regions to split from the poorer south, and although the probability of the return to the Italian domestic currency is very unlikely, the comments further damage the reputation of the single currency.

Data for the day again looks sparse, with the only release of note in the form of the Bank Of England minutes due at 9:30am. The specific arguments Andrew Large used to justify a rate hike seem intact, as households continue to accumulate debt and inflation remains around target, therefore another 8-1 hold is likely. The real interest however, will be whether any MPC members viewed the current softness in consumer indicators as a reason to consider cutting interest rates. This seems unlikely after Governor King’s slightly hawkish speech last week, but with indicators beginning to point south, a more dovish tone should be evident.

Also of note - Federal Reserve Chairman Alan Greenspan and U.S. Treasury Secretary John Snow will testify at 10 a.m. on Thursday before the Senate Finance Committee on China, and as China released statements overnight pointing to a possible delay in re-valuation – ‘It is impossible for any changes (to the foreign exchange mechanism) to be carried out under heavy outside pressure or when speculators are looking for an opportunity.’ – look out for an interesting testimony!

Beleaguered Euro set for further losses

Another torrid day for the single currency yesterday after Otmar Issing (ECB chief economist) pointed out that weak economic growth had reduced inflationary pressures, and hinted that financial markets might be right to price in a possible rate cut.

The report suggested that any further weak economic data from the eurozone (a certainty you may argue) might well precipitate a cut in the base interest rate. This news following on from the failure of EU budget talks over the weekend seemed just the catalyst the market was looking for to push the Euro lower following the recent political debacle suffered by Europe.

Further euro weakness can also now be argued as carry trades begin to be placed through the Euro (funding through euro and investing into higher yield foreign denominated assets) in replacement of the increasingly expensive Dollar carry trades.

Balancing the scales somewhat however is the simple fact that a weaker euro should actually stimulate the export economy in the eurozone, and help to counteract the inflationary pressures from spiralling oil prices, thus eventually negating the need for a rate cut….watch this space…

Data for the day (already released) begins in France in the form of May Consumer Spending. This materialised at –0.9% (largest month on month drop since August 1997) from a –0.2% forecast, as rising unemployment and weaker auto sales impact following an unusually strong April.

The only other release of note today is the 10am release of June ZEW Business Survey from Germany. Look for an increase to circa 20.0 on the expectations component (13.9 last time out) as the announcement of an early general election and the likelihood of a new government increases optimism. In addition, the recent Euro weakness should have improved the situation for export-oriented companies. However, the recent economic figures in Germany have mainly disappointed and as a result look for no improvement in the current conditions component of the survey (-69.0)

Technical levels for the day

GBPUSD rally stalled yesterday and bullish signals rolling over to bearish, now citing weakness to support at 1.8190 and 1.8110. Resistance remains at 1.8310 and 1.8400.

EURGBP rally to 0.6715 last week now 70% unwound, with majority of indicators pointing for a further charge down to support at 0.6625, 0.6575 should this breach. Resistance at 0.6680 and 0.6725.

Finally for the day, EURUSD has a 1.2120 pivot that needs to breach to confirm a downtrend to support at 1.2060 and 1.2015. Resistance at 1.2185 and 1.2240

Euro falls vs dollar as EU crisis deepens

The euro tumbled against the dollar in early trading on Monday after European Union leaders failed to agree on a long-term budget, deepening a crisis triggered after French and Dutch voters rejected a proposed EU constitution.

In early Asian trade, the euro shed about one cent, halving the gain made on Friday when it hit a nine-day high as a record U.S. current account deficit sapped appetite for the dollar.

Friday evening brought in the much-awaited dollar sell off with readings showing that the US current account deficit climbed to record high at $ 195.1 billion against expectation of $190.0 billion in first quarter of 2005 or 6.4 percent of U.S. gross domestic product and up from $188.4 billion in the final quarter of last year.

Crude Oil jumped near record levels at 59 threatening further higher levels on supply concerns.

The euro fell as low as around $1.2170. That compares with around $1.2285 in late U.S. trade on Friday, when it rose as high as $1.2289.

The euro's fall also drove the Japanese currency down, with the dollar rising as high as around 109 yen from around 108.60 yen.

The break down at the summit threatened the 25-nation bloc with financial paralysis on top of the political uncertainty wrought by the referendum defeat in France and the Netherlands.

Traders said the huge deficit could make investors think twice about buying dollar assets, possibly capping the currency's advance in the near future.

Data from the U.S. Commodity Futures Trading Commission showed on Friday that speculators sharply increased their net short position in the yen and sterling against the dollar in the week that ended on June 14.

Outlook for the day
EUR/USD - Euro has picked up the momentum on the higher side and is expected to correct up to 1.2320 with support at 1.2230/40.
GBP/USD - Cable is also expected to rise against dollar and test the resistance at 1.8320. Immediate support comes at 1.8220.
USD/JPY - Yen is expected to weaken further against Euro and stay range bound against dollar. The range for the day is 108.40 – 109.30.