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Portugal Alarms Market into Panic State

A guest post written by DAR Wong

Currency Market Observations – 14 July 2014

Fundamental Outlook

The US job market continues to gain traction in recovery. Portugal roils market confidence of investors after its subsidiary member fails to pay short-term debts. Market recovers after Banco Espirito Santo SA justified their reserve buffer after regulatory requirement. Pound slows down in ascension after reaching 5-year high record.

The US consumer credit rose in May by USD19.6 billion after followed revised USD26.1 billion gain in April. Stronger employment is still main source of booster to borrowing though data has declined. Jobless claims declined by 11,000 to 304,000 in the week ended July 5 as job market is continuing to improve gradually.

The US government posted USD70.5 billion surpluses in June compared with USD116.5 billion excess a year earlier. Data reveals the tapering effects of stimulus withdrawal that will target to be completed by year-end.

The Federal Open Market Committee (FOMC) minutes released on June meeting states that the interest rate on excess reserves deposited by banks with Federal Reserve should become an important tool for stimulus exit. Meanwhile, policymakers are moving to utilizing new main tool to benchmark monetary policy as they exit the remaining USD35 billion stimuli.

Japan’s machinery orders dropped 19.5 percent in May as large companies are seen tightening on capital spending. Yen begins to strengthen against Dollar as investors are losing confidence in Bank of Japan’s policymaking. Some market analysts are betting for Japan to return to deflation as economy slow down again.

German industrial production, after adjusted for seasonal swings, slid 1.8 percent from April and dropped for third month as economy stalls. The 18-nation euro-area economy grew just 0.2 percent at the beginning of the year, compared with an expansion of 0.8 percent in Germany. European Central Bank has warned that a prolonged period of low inflation could hamper the recovery.

European Central Bank (ECB) Pesident Mario Draghi has repeatedly said the ultra-loose monetary policy is not sufficient to reverse ailing economy into recovery if the governments backslide. He favors that more-centralized powers should be erected to push various governments for restructuring economic reform.

After mid last week, Portugal’s 10-year bond yield jumped 21 basis points to 3.97 percent. The second largest lending bank in Portugal, Banco Espirito Santo SA, has one of its subsidiary member facing difficulty in paying short-term debts. After that, market triggered instant panic selling in European and US stocks.

Fortunately, Banco Espirito Santo SA has reassured investors by revealing its exposure to related companies. The lender also announces that it has EUR2.1 billion buffer above the regulatory minimum requirement following a capital increase in June.

UK manufacturing unexpectedly slumped in May by most in past 16 months. Factory output plunged 1.3 percent from April, the most since January 2013 and the first decline in 6 months. Before weekend, Pound retreated after reaching its 5-year high record at 1.7170 against the dollar as the growth has been struggling to keep up the pace of analysts’ estimates.

Technical Forecast

USD/JPY has come to test the crucial support at 101.00 levels on Friday. Technically, it is essential to observe this market for coming week because the trend may effectively break below 101.00 supports for a new bearish sentiment or reverse up from central bank’s salvage. We foresee market intends to test the “Abenomics” theory by aiming to dive at 100.00 benchmarks as investors are waning confidence in recovery,

EUR/USD traded in narrow range around 1.3600 areas last week. The whole trend still malingers inside 1.3500 – 1.3700 ranges with no clear sign of direction. This week, we propose to observe fundamental news in European debts in case additional financial routs might devalue Euro currency.

GBP/USD fell off the recent high 1.7180 and settled at 1.7100 regions before weekend. Technically, the trend has shown exhaustion though buying interest still emerges at 1.7000 benchmarks. This week, we reckon the market will consolidate by trading sideways from 1.7000 – 1.7180 regions until it gathers strength to march higher again. Abandon your long-view if the trend breaks below 1.7000 supports.

Dar Wong

This post is contributed by OPF Guest Blogger, DAR Wong.

DAR Wong is an approved fund manager in Singapore with 25 years of global trading experiences. You may reach him at dar@pwforex.com

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

 






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