FX Market Summary 05-29-2013: Short covering boosts Euro

The Euro was able to resist further selling pressure on Wednesday despite weak economic data. The German labour-market data was weaker than expected with a 21,000 increase in unemployment for May. This was the third successive monthly increase and the largest since June 2009. The latest ECB data also registered a continued decline in private-sector lending, maintaining pressure for further ECB action to improve lending prospects.

In its latest economic report, the OECD increased its US growth estimates slightly, but there was a downgrading of the 2013 profile as a whole due to a downgrading of Euro-zone prospects. The OECD also called for more ECB action including the introduction of a negative deposit rate.

EUR/USD did, however, find support below the 1.2850 level and edged towards the 1.29 level ahead of the US open despite the weaker German economic data. There was a sharp increase in volatility as the Euro broke above the 1.29 level. There was evidence of momentum buying and a covering of short positions with the upward move exacerbated by stop-loss Euro buying from over-extended short-term players. The Euro pushed to highs above 1.2950 and proved resilient running into the European close. There was also a general paring of long dollar positions as the Australian dollar also recovered sharply from levels last seen in October 2011.

The Nikkei index and yen performances were again an important market focus with a resumption of the volatility seen last week. After strong opening gains, the Nikkei index retreated to show only a marginal advance for the day and there was a retreat in the USD/JPY to the 101.60 area from a peak near 102.50. After a brief respite from selling the dollar slipped to test support below 101 during New York trading.

The latest UK retail sales data was disappointing with the CBI sales index slipping to a -11 in the latest release from -1 previously and this was the weakest release since January 2012. Sterling trends, however, tended to be dominated by technical factors with initial support following a successful test of 1.50 support against the dollar with a move back above 1.51. Sterling was also able to find support close to 0.86 against the Euro despite persistent economic doubts. Monetary policy remains an important focus ahead of Carney’s arrival as Bank of England Governor next month.

Meanwhile in Ottawa, Carney chaired his final policy meeting as Bank of Canada Governor. As expected, interest rates were held steady at 1.0% with no change since September 2010. The policy statement maintained its expectations that, after a further period of stability, some modest withdrawal of monetary stimulus would be required. The Canadian dollar found some support at 2013 lows beyond 1.04 against the US dollar, but was unable to make much headway.

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