After a good first couple of weeks of this month, Monday witnessed some profit-taking in the greenback. Other than dollar longs taking profit, a slight improvement in risk appetite and some market participants taking a more benign view of Greek developments, it was difficult to pinpoint any other particular rationale for the price action. Two major beneficiaries were the Swedish krona and the Swiss franc, both up a full 1%. The EUR, which in Monday’s Asian session briefly fell below 1.4050, slowly recovered to reach 1.42. News out of Brussels that European leaders had agreed on a Portuguese bailout gave the single currency a boost. The Aussie likewise fared better, reaching 1.06. As always, the pound was caught in the middle, outperforming the weaker dollar but losing out to both the euro and the franc.

Sovereign risk remains a negative for the euro, though the single currency did manage to regain some ground from seven weeks lows back to highs of $1.4244 mid yesterday. Expectations of higher interest rates in the euro zone were supported by yesterday’s final inflation report for April. Meanwhile, euro zone finance minister approved a €78 billion fiscal support package for Portugal yesterday and the country will receive aid as part of the deal from the IMF. However, while sentiment does seem to have improved slightly it struggled to hold these gains overnight and downside risks remain on the possibility of further long liquidations. In particular, ongoing concerns about debt restructuring in Greece are likely to continue to overshadow the euro.

Jean-Claude Juncker of Luxembourg, who chairs euro zone finance minister meetings, ruled out restructuring but appeared to leave the door open to a “reprofiling” of Greece’s debt. Under this, investors would be encouraged to agree to an extension of the maturities of the debt they hold, which would buy the country more time to sort out its debt problems. Unhappy with the deeply unsettling insinuation that accompanies words such as ‘default’ and ‘restructuring’ in the context of Europe’s sovereign debt crisis, policy-makers have coined a new, lovelier term – ‘debt re-profiling’. It means exactly the same thing as a restructuring or a default, but it sounds much less frightening.

In other news overnight, the yen came under some selling pressure on technical selling with M&A activity also reported to be driving flows. Sterling, meanwhile, was little changed but remains susceptible to swings in risk sentiment. Events to focus on today include the release of the German ZEW index for May (which is expected to dip) as well as US housing starts and permits for April. The US industrial production report for last month is also due for release.

Economic Releases.

Tuesday: UK: DCLG House Prices, March (previous 0.7% YoY); CPI, April (previous 0.3% MoM and 4.0% YoY); GER: ZEW Current Situation, May (previous 87.1); EC: Economic Sentiment, May (previous 19.7); US: Housing Starts, April (expect 570K, previous 549K); Industrial Production, April (expect 0.4%, previous 0.8%); Capacity Utilisation, April (expect 77.6%, previous 77.4%).

Regards,

Tom Trevorrow
Senior FX Trader
Tel: +44 (0)1736 335264 | SMS: +44 (0)7781 482507 | Fax: +44 (0)1736 369435
Email: Tom.Trevorrow@torfx.com | Web: www.torfx.com