Eurozone Growth Pace Surges- Dollar Weakness

7/22/2010 07:00 am: EUR/$..1.2853 $/JPY..86.79 GBP/$..1.5281 $/CHF..1.0421 AUD/$..0.8876 $/CAD..1.0404

Eurozone Growth Pace Surges- Dollar Weakness

Asia Pacific markets were mixed after US equities saw steep declines, with the Dow, the S&P, and the Nasdaq, off by 1%, 1.3%, and 1.6% respectively. Risk appetite turned after Federal Reserve Chairman Ben Bernanke told congress that the" economic outlook remains unusually uncertain," and that the Fed was ready to implement further monetary easing if the recovery falters. Although the remarks were largely in line with the latest FOMC minutes released last week, equity bourses fell sharply as nervous investors scaled back positions on concerns that the Fed seemed to lack confidence in the direction the recovery. Treasury yields fell to record lows with the 2-year bond dipping to .56. In the Asian session, markets lacked proper footing with the Nikkei 225 and the S&P/ASX 200 index closing lower by .6%, and .9% respectively, while the Hang Seng index nudged higher by .5%. The Shanghai SE composite was one of the strongest performers, climbing more than 1% on lingering optimism that China will continue moderately loose monetary policy in the second half of 2010.

European markets rallied after reports today showed a surge in the pace of growth in the region, with both German and Eurozone Manufacturing /Service PMI figures beating consensus estimates. Fueling the rally was better than expected industrial orders, with new orders crushing forecasts with a gain of 3.8%. Markets were looking for a reading of -.1% from 0.9% the previous month. Commodities advanced with crude oil advancing 1% to $77.05 per barrel, albeit remaining in check on rising US inventories. Gold recouped early losses to trade at $1187 per ounce, but remains heavy after falling more than 6% from its record high last month at $1265.

Commodity currencies were the beneficiary of improved risk appetite with the aussie and the loonie posting broad gains. The aussie was the best G7 performer versus the greenback, advancing more than 1.1% to a 2-month high, trading just below the .89 handle. The dollar was softer against all the majors, with the index falling by .6% to 82.78 on increasing concerns regarding domestic growth prospects and the health of the economic recovery.
EU Growth Boosts Euro

The euro snapped three days of losses after falling as low as 1.2740 late in Asian trade. The single currency advanced nearly 1% after stronger than expected economic data out of the Eurozone boosted demand for riskier assets. Traders remain cautious ahead of tomorrow's stress test results, with heightened volatility amid thin trading conditions. Resistance is eyed at the R2 monthly pivot at 1.2880, backed by the 1.29 handle, and 1.2950. Upward momentum strengthens with a breach of the 1.30 figure. Support starts at 1.28, followed by 1.2750, and 61.8% Fibonacci retracement taken from the June 13th and July 20th ranges, at 1.2715. A break below 1.2580, would signal the completion of a 6-week correctional upswing, and the resumption of the overall bearish tone for the euro.

Cable Resistance

The sterling gained on better than expected retail sales data out of the UK. June core retail sales printed at 1.0%, beating calls for a reading of just 0.6%. The May figure was also upwardly revised to .7% from 0.5%. The pound rose to within striking distance of the 1.53 handle before bouncing off the upper bound trendline of the downward channel dating back to July 15th. Resistance holds here with subsequent ceilings seen higher at 1.5340 and 1.54. Support rests at the 1.52 figure, with stronger demand seen lower at 1.5140.

Today's economic calendar sees retail sales figures out of Canada, and weekly jobless claims from the US at 8:30am in New York. May retail sales figures are called higher by 0.4% after falling to a 15-month low in April, at -2.0%. Initial jobless claims are expected to increase to 445k, up from 429k last week, while continuing claims are seen lower by 90k to 4.59 million. Later in the day, the housing sector gets an update with existing home sales and the monthly home price index out at 10am. June existing home sales are expected to plummet by 9.9%, the largest one month decline since December, while the index is called lower by .3%. Traders will be closely eyeing Fed Chariman Bernanke's second day of testimony on capitol hill, as he gives his monetary policy report to the house panel.

Tomorrow, the results of the much anticipated EU banking sector stress test will be released. We do not foresee a strong impact on markets unless the report is surprisingly negative. Also on the agenda, the German IFO business climate surveys, and second quarter GDP figures from the UK. European markets are stronger by 1%-2% across the board , with US equity futures pointing to sharply higher open, early in London trade.

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