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Market Review - 07/07/2010 21:39 GMT

Euro rises to a seven-week high as global stock rally boosts risk appetite

Although the single currency remained under broad-based selling pressure in Asian morning on continued long liquidation and fell to an intra-day low 1.2553 in European morning after the release of weaker-than-expected German Factory orders, which dropped unexpectedly by 0.5% in May versus the economists' forecast of a rise of 0.5%, the euro rebounded and rose marginally two pips abv Tuesday's high of 1.2663 to a seven-week high of 1.2665 in NY mid-day on improved risk appetite as U.S. stocks markets rallied due to the better-than-expected earnings forecast issued by State Street Corp., the world's second-largest custodian bank. DJI, Nasdaq and S&P surged by 2.82%, 3.13% and 3.13% respectively (DJI ended the day above 10000 at 10018).

The comment from the committee of European Banking Supervisors also supported euro as it said 91 banks would take part in a probe into the health of its banking system, including many regional banks where markets suspect most of the sore spots in order to restore confidence in the sector.

Earlier, the plans to test the financial health of European banks pressured euro as two banking sources said the stress tests for European banks would not include a haircut on German sovereign bonds. They added the test would assume 2010 German GDP growth of 0.2% and a 'small decline' in 2011. European Union bank regulators were expected to reveal how tough their health checks of the region's banks would be, in hope of restoring markets' confidence.

In addition, German Finance Minister Wolfgang Schaedule said banks face some pressure to agree to make the results of stress tests public though it is up to lenders to decide on publication. He added Germany could cope with the results of the stress tests which are expected to be published later this month.

Although the British pound fell in Asian morning in reaction to U.K. BRC retail shop price index which rose 1.5% y/y in June, the lowest rate since March and dropped to an intra-day low of 1.5082 in European morning, cross buying in sterling (eur/gbp dropped fm Tuesday's high of 0.8341 to 0.8292) lifted price to 1.5219 due to the rebound in European equities and the rally in U.S. stocks before retreating. FTSE-100, CAC-40 and DAX ended the day up by 1.00%, 1.76% and 0.87% respectively.

Versus the Japanese yen, although the greenback fell to 87.02 in European morning, the pair rebounded strongly to a high of 87.78 on cross-selling in yen (eur/jpy, aud/jpy and gbp/jpy rallied from 109.32 to 110.95, 73.55 to 76.01 and 131.24 to 133.35 respectively) due to the firmness in European n U.S. stock markets.

The commodity-linked currencies also strengthened against the US dollar on Wednesday as the Australian dollar rose from 0.8450 to 0.8664, the New Zealand dollar advanced from 0.6887 to 0.7053 while usd/cad fell sharply fm 1.0606 to 1.0467.

Economic data to be released on Thursday include: Japan Machine orders, Current account, Economic watch DI, Machine tools orders, Australia Employment change, Unemployment rate, Swiss Jobless rate, Germany Export, Import, Trade balance, Industrial production, U.K. Industrial production, Manufacturing production, BOE rate decision, Halifax hse prices, EU ECB rate decision, U.S. Jobless claims, Canada New housing price index.

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