It was a very jumpy session as investors prepared themselves for a two-day EU summit in Brussels that starts tonight. Most of the price action was focused on the majors, with USD facing a market wide sell-off. However, looking at price action across numerous asset classes we can safely assume that the US dollar weakness was not the result of risk sentiment. Instead, it appeared to be positioning ahead of the summit, with a few big names choosing to dump USD.
EURUSD rocketed through 1.2500 and onwards to a session high of around 1.2525 – proven resistance level from 26 June. It was a similar story for AUDUSD which made short work of 1.0100, before coming to a stop around 1.0125. The kiwi was also sent higher against the dollar but, interestingly, the pair soon retraced back to around its 200day SMA.
However, equity indexes failed to capitalise on opening gains. In fact, most major stock markets spent the majority of the session retracing their respective opening gains, with the exception of the Nikkei225. At the time of writing the ASX200 and Nikkei225 are in the green by around 0.05% and 1.34% respectively*, with financials leading the way in Japan. On the other hand, it was fairly quiet day for commodities, despite Morgan Stanley downgrading their gold forecast for 2013.
Early in the session, retail sales data out of Japan helped the Nikkei225 hold onto its opening gains but failed to stop investors flocking to the yen. Retail sales increased 3.6% from a year earlier, significantly better than the 2.9% rise that was predicted. Consumption is being bolstered by higher demand in reconstruction areas following last year’s devastating tsunami. Overall, the data is good news, but looking ahead it is hard to see much of a light on the horizon for the Japanese economy, at least in the short-medium term.
Elsewhere, new home sales and job vacancies data were released out of Australia, with the former increasing 0.7% m/m (prior +6.9%) and the latter falling 5.3% during May (prior +0.7%). In NZ, business confidence weakened during June according to data released by the NBNZ, with the index dropping to 12.6 from 27.1. The kiwi dropped slightly on the back of the data but the aussie was relatively unaffected by the figures out of Australia.
All eyes and ears are now focused on Brussels for the EU summit. Despite today’s price action and the subsequent USD sell-off, the market doesn’t appear to be overly optimistic about the summit which creates the potential for a surprise on the upside. In fact, was today’s USD sell-off a sign investors are worried about a surprise on the upside? Possibly, but either way it appears any risk rally may be short-lived. Thus, we are looking to short risk currencies in the event there is a small surprise on the upside which results in a risk rally.