London Session

EUR/USD has been one of the biggest moving exchange rates this morning. The USD has been bought back on tension following N.Korea's nuclear and missile tests and as attention swings towards bad debt held by European banks, in particular by Germany's.

The yen is also in favour vs the EUR and GBP this morning as the mood is favouring safe haven over risk. USD gains have now headed through the EUR/USD1.3875 level which offered some support consistent with talk of stops being built at this level. It is impossible to predict what the next step will be with respect to news from North Korea, though it is possible that the market reaction could diminish given talk there is no clear provocation in N.Korea's action. While this would see this morning's USD gains relax, EUR bulls should remain cautious given that it is likely that further bad news will be heard about European bad debts during the summer months. The fact that non-UK European banks were not tainted with a huge amount of US subprime debt kept them largely out of the headlines during the height of the financial crisis. However, with unemployment in the Eurozone rising, it appears inevitable that issues stemming from subprime debt closer to home will rise. Sanio, president of Germany's Financial Regulator BaFin warned in today's Daily Telegraph that a series of brutal downgrades of mortgage securities by ratings agencies would cause broader stress across the credit system. The Daily Telegraph claim that German banks' write offs could reach a huge EUR816 bln. This news is not helped by the fact that Germany's IFO index yesterday came in at a weaker than expected 84.2 and that Q1 GDP was today confirmed at a horrible -6.9% y/y. Germany's Gfk consumer confidence survey was in line with expectations at 2.5, while Eurozone Mar new orders today registered a softer than expected -0.8% m/m decline.

In line with the movement away from risk both AUD/USD and NZD have been hit heavily today. The New Zealand trade balance came in slightly above expectations at NZD276 mln stirring little market reaction.

This afternoon attention will switch back to the US housing market and the release of the Case-Shiller price index. US May consumer confidence is also due and while the market is expecting an improvement to 42.6, the market's optimism about the pace of the recovery has been dampened over the past fortnight by some disappointing economic data. Given today's heavy 2yr supply, last week's concerns about the credibility of US debt is unlikely to have moved far from the headlines.

Upcoming Economic Data Releases (US Session). Prior, Expected