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OctaFX.Com - Gold eases below $1,670/oz as dollar recovers

LONDON (Reuters) - Gold prices slipped below $1,670 an ounce on Friday, pausing in their biggest one-week rally since late February as the dollar firmed against key currencies, with the euro falling out of favor due to worries over Spain's financial health.

Nominally higher risk assets, like stocks and commodities, also came under pressure after Chinese growth data released overnight failed to meet expectations.

Spot gold was down 0.4 percent at $1,668.66 an ounce at 1453 GMT, while U.S. gold futures for June delivery fell $10.20 an ounce to $1,670.40.

The metal is still on track to rise 2.4 percent this week after a soft U.S. jobs report last Friday stoked expectations for new quantitative easing measures. Ultra-loose U.S. monetary policy was a key driver of record gold prices last year.

However, a rebound in the dollar on Friday took the wind out of the precious metal's sails.

"Especially in the United States, the investment climate is very neutral towards gold at this stage. People really need to see a policy catalyst before they come back aggressively," Standard Bank analyst Walter de Wet said.

"On the physical side, from the end of this month there is really no seasonal demand coming until August," he added. "It is going to be difficult to break much higher if we don't have this physical buying supporting any investment demand coming through for the next two or three months."

The dollar was up 0.4 percent against the euro as Spanish bond yields rose on data showing the country's banks were relying heavily on ECB lending, and after Chinese growth data disappointed traders. (FRX/)

The single currency hit a session low after a report showed U.S. consumer sentiment slipped in early April.

A report released on Friday showed China's economy grew at its weakest pace in nearly three years in the first quarter, with annual rate of expansion easing to 8.1 percent from 8.9 percent in the previous three months.

European shares were on track for a fourth straight week of losses as renewed concerns about the rising cost of borrowing in some highly indebted euro zone countries dampening sentiment, while safe-haven German bund futures rose. (.EU) (GVD/EUR)

Gold is expected to remain closely tied to the dollar on Friday. A stronger dollar tends to weigh on gold, as it makes dollar-priced commodities more expensive for other currency holders, and curbs the metal's appeal as an alternative asset.

STRUGGLE FOR MOMENTUM

Gold is on track to rise nearly 7 percent this year but has struggled to gain momentum after a strong showing in January as expectations for a further round on monetary easing fluctuate.

A Reuters poll released Friday showed analysts are turning more cautious towards gold, with heady forecasts of $2,000 an ounce receding fast as the economy stabilizes. (PREC/POLL)

While the precious metal remains on course to rally through this year and into 2013, just one analyst of 33 polled expected it to average more than $2,000 an ounce this year, against five analyst of 45 in a similar poll in January.

"The last six months has seen an increase in correlation between gold and other risk assets," Schroders Private Banking head of asset allocation Robert Farago said on Friday. "While this is not readily explainable and therefore may be somewhat coincidental, it does reduce the metal's attraction as a portfolio diversifier."

"I am not convinced that a deflationary environment will prove favorable in the short term," he added. "This would produce a liquidity squeeze and gold may well prove a source of funds since almost all investors are sitting on profits."

Physical buying in Asia's bullion market slowed to a trickle on Friday, as higher prices pushed traders to the sidelines, but a gold-buying festival in India in late April is likely to help bring in some demand from the world's top consumer of the metal.

Silver was down 0.9 percent at $32.02 an ounce, spot platinum was down 0.5 percent at $1,590.75 an ounce and spot palladium was down 0.2 percent at $647.75 an ounce.

CME Group, the biggest operator of U.S. futures exchanges, said it will cut margins for COMEX silver futures for the second time since February in an attempt to boost liquidity after a narrow price range tempered trading interest.

Apr 13, 2012 15:19

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Eurozone March inflation revised up to 2.7 percent

Eurozone inflation in March revised up to 2.7 percent; increase was unexpected

BRUSSELS (AP) -- Inflation in the 17 countries that use the euro was higher than predicted in March, largely because of higher energy and transport costs, official figures showed Tuesday.

Eurostat, the EU's statistics office, said eurozone consumer prices in the year to March rose by 2.7 percent, up from the initial prediction of 2.6 percent. March's rate was the same as the previous month's and indicates that price pressures remain despite mounting fears that the eurozone as a whole will fall back into recession.

The surprise increase in inflation has reined in expectations that the European Central Bank will cut interest rates again any time soon. The bank, which is tasked with keeping inflation just below 2 percent, last cut borrowing costs in December, taking its main rate down to the joint-record low of 1 percent.

With oil prices remaining elevated, analysts said inflation could well remain above target for a while yet, even though Europe's dim growth prospects could weigh on consumer demand and wage increases.

Gustavo Bagattini, European economist at RBC Capital Markets, said he expects inflation to start declining in the second quarter of the year but won't average anything below 2.5 percent.

"This is consistent with our 2012 average forecast of 2.4 percent, which is in line with the ECB's forecast, meaning that the governing council will continue to have to accept a higher rate of inflation temporarily," Bagattini said.

The euro pushed ahead after the figures from $1.3145 to a day's high of $1.3173.

Apr 17, 2012 09:06

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OctaFX.Com - Canadian Dollar Soars on Hawkish BoC Comments

Currencies and equities are trading slightly higher this morning thanks to better than expected economic data from Europe and a relatively healthy Spanish bond auction. The EUR/USD is taking its cue from Spanish bond yields and the steep decline back below 6 percent encouraged investors to dip their toes back into euros. For the time being the 1.30 level continues to hold in the EUR/USD and even though we believe this level will be taken out eventually, a further rise in Spanish bond yields would be needed for that to happen. Mixed U.S. housing market numbers failed to have a lasting impact on the dollar. Housing starts fell for the second month in a row by 5.8 percent. This was the steepest slide in nearly a year and drove starts to a 5 month low. Building permits on the other hand continued to rise by 4.5 percent. Unlike starts, permits have gradually increased for the past 3 months and are now at its highest level since September 2008. The discrepancy between starts and permits is good news because it represents a tremendous amount of backlog and once the recovery gains momentum, housing starts will rise quickly because permits have already been attained by builders.

Meanwhile up North, the Bank of Canada is gearing up for a rate hike. According to the BoC, "removing stimulus may become appropriate." Unlike other parts of the world crippled by high debt levels and slowing growth, Canada has benefitted significantly from the improvement in the U.S. economy and the rise in oil prices. Business and consumer confidence in Canada improved to the point where the BoC felt comfortable enough to raise its 2012 growth forecast to 2.4 from 2 percent and its 2013 forecast from 2.4 to 2.8 percent. Most of Canadian growth is expected to come from domestic demand. Last month, Canada experienced its strongest pace of job growth since 2008 and this improvement in the labor market will translate into stronger consumption. In terms of external factors, the BoC is looking at it from a glass half full point of view - they expect Europe to rise from recession in the second half of the year and they view the U.S. economy has slightly stronger. If not for Europe's troubles, the BoC would have probably raised interest rates today. However don't interpret the BoC comments to mean that a rapid series of consecutive rate hikes will follow. The central bank will raise interest rates gradually to avoid over tightening in what can still be characterized as uncertain global economic conditions. The hawkish comments from the Bank of Canada drove USD/CAD to 0.99 and it should only be a matter of time before USD/CAD slips to a fresh 7 month low.

Apr 17, 2012 09:10

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OctaFX.Com -Spanish bill sale, German ZEW support euro

LONDON (Reuters) - The euro rose against the dollar on Tuesday after Spanish bill sales went through smoothly and a survey showed a rise in German analyst and investor sentiment, easing some of the market's concerns over euro zone debt.

However, analysts said Spain's precarious fiscal position would remain a worry and the most important test would come with an auction of Spanish 10-year debt on Thursday, which could put the euro back under pressure.

Spanish 10-year government bond yields dipped below 6 percent after jumping on Monday on fears its deficit and weak economy may force it to seek international help. Analysts said these concerns would limit the euro's gains with most investors still bearish about the common currency.

"We shouldn't read too much into the Spanish bill auction or into the ZEW data - the German Ifo survey (on Friday) and Spanish 10-year auction will be more important,"

said Gavin Friend, currency strategist at nabCapital.

"The target for the euro is $1.32/$1.3225 but I don't see it much above there."

He said the euro would face further tests with the G20 and IMF meeting at the end of this week and the first round of the French presidential election on April 22.

The euro was last flat on the day at $1.3135, having earlier surpassed Monday's high to hit $1.3173, with traders saying stop-loss buy orders were triggered on the breaks above $1.3150-60. They said a U.S. bank and Swiss investors had bought euros.

More gains would see it target the 55-day moving average at $1.3204, with the euro also supported by the German ZEW survey which showed analyst sentiment in Europe's largest economy rising unexpectedly in April to its highest level since June 2010.

The common currency hit a low of $1.2995 on Monday before rebounding as investors who had earlier initiated bearish bets reversed those positions. Analysts said the bounce above $1.30 suggested that level was an important support that could be difficult to breach. Once below there, however, traders could focus on a move towards the January low of $1.2624.

"I think we'll see a test of $1.30 within the next week," said Niels Christensen, currency strategist at Nordea in Copenhagen, adding concerns about Spain's elevated debt, shrinking economy and high unemployment would keep the euro weak.

ANOTHER SPAIN TEST

Investors were relieved as Spain sold 3.2 billion euros of 12 and 18-month bills, although at much higher yields compared with a month ago. Thursday will see a far bigger test when Spain sells 10-year and two-year bonds.

Compounding Spain's fiscal woes, its banks borrowed a record 316.3 billion euros from the European Central Bank in March, almost double February's total, as they remained all but excluded from wholesale credit markets.

The euro was up 0.3 percent at 106.0 yen, recovering from a trough of 104.63 yen on Monday, a level not seen since mid-February.

The euro and other riskier currencies could be helped further if U.S. housing data and industrial output for March, due at 8:30 a.m. EDT (1230 GMT) and 1315 GMT come in on the stronger side of expectations.

The dollar rose 0.3 percent against the safe-haven yen to 80.64 yen, above a seven-week low of 80.29 hit on Monday.

The higher-yielding Australian dollar edged up 0.2 percent at $1.0370 as stock markets recovered. It cut earlier losses after Reserve Bank of Australia policy meeting minutes showed it would consider cutting interest rates in May if data confirmed a benign inflation outlook.

Apr 17, 2012 10:52

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OctaFX.Com - Canadian Dollar Surges as Hawkish BoC Raises Rate Hike Expectations

Although the key rate was kept on hold at 1.00 percent, an increasingly hawkish Bank of Canada has sent the Canadian Dollar surging early in the North American trading session. The shift in rhetoric has boosted rate hike expectations, improving the yield outlook for the world’s tenth largest economy.

The Bank of Canada left key interest rate on hold at 1.00 percent for the thirteenth consecutive meeting today, but the real story lies within the central bank’s statement accompanying the release. The BoC said that higher rates “may become appropriate” in the future as actual economic growth and price pressures have exceeded economists’ forecasts.

Governor Mark Carney said that “In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.” Governor Carney went on to say that “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.” Market participants have taken this as a sign that the BoC will move to raise rates in the coming months, with the Credit Suisse Overnight Index Swaps now showing that 18.0-basis points are being priced in over the next 12-months (from 0.9-bps ahead of the meeting).

 

USDCAD 1-min Chart: April 17, 2012

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Charts Created using Marketscope – Prepared by Christopher Vecchio

On the more hawkish than expected tone, as market participants have started to price in higher rates in the future, the Canadian Dollar has soared across the board, but most notably against the Euro and the Japanese Yen. The EURCAD has dropped over 95-pips on the rate decision (UPDATE: as of 14:28 GMT, the EURCAD was down over 110-pips post-rate decision). Similarly, the CADJPY jumped over 65-pips (UPDATE: as of 14:28 GMT, the CADJPY was up over 75-pips post-rate decision).

The USDCAD also traded lower, falling over 60-pips immediately (UPDATE: as of 14:28 GMT, the USDCAD was down over 70-pips post-rate decision).

Apr 17, 2012 14:28

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OctaFx -Euro falls for 3rd day on nagging funding worries

NEW YORK (Reuters) - The euro fell for a third straight session against the U.S. dollar on Thursday despite a decent Spanish bond sale as investors remained skeptical about funding issues in the euro zone.

The euro also tracked the rise in credit default swaps and the widening of yield spreads between the safe-haven German bunds and peripheral fixed income debt, suggesting growing nervousness about liquidity in the financial system and sustainability of the region's debt.

"This is all emblematic of the fact that the market remains very nervous about the state of credit in the euro zone," said Boris Schlossberg, director of FX research at GFT Forex in Jersey City.

"Despite the fact that we had a decent Spanish bond auction, there is just basic skepticism not only about the sovereign debt market but also the health of the overall banking system, particularly in Spain."

Spain's Treasury issued 2.5 billion euros in two- and 10-year bonds, at the top end of the targeted amount. Yields on the key 10-year bond were higher, however, reflecting fears that Spain may miss budget deficit targets and about its banking sector.

The euro dropped 0.2 percent to $1.3087 after hitting a session low of $1.3068, reversing gains that took the single currency to $1.3164 following the Spanish auction.

Traders said they were inclined to sell into any euro rallies, with the rise in Spanish and Italian yields undermining any optimism from the auction. Market talk of a French downgrade also undermined sentiment towards the common currency.

The euro also modestly sold off after a report showed that U.S. initial jobless claims were weaker than expected, which slightly dampened risk appetite.

The euro held above strong chart support at $1.30. But an escalation of concerns about Spain's high level of debt, at a time when the economy is faltering, would put the euro back under pressure, potentially taking it towards the 2012 low of $1.2624.

"The market has come to realize that positive bond auctions are not Spain's salvation," said Neil Mellor, currency strategist at Bank of New York Mellon, adding it was only a matter of time before the euro broke below $1.30.

"There are too many negative elements in the euro zone. If $1.30 breaks, we have only got minor levels of support until the January lows. We cannot preclude a sudden move lower."

Many in the market said the euro would head lower in the medium term given the risks that budget and debt problems in Spain will worsen and uncertainty over the outcome of the French presidential election, which polls suggest will result in a leadership change.

Traders cited talk of hedge funds betting the euro will fall to $1.25 soon after the French poll concludes early next month.

The safe-haven Japanese yen, meanwhile, fell, as equities gained and after Bank of Japan Governor Masaaki Shirakawa stressed the central bank's commitment to powerful monetary easing.

The dollar rose 0.3 percent to 81.510 yen, triggering reported stop loss buy orders around 81.60 yen, with traders earlier citing flows related to the launch of a large investment trust by a Japanese investment bank.

The euro was up 0.1 percent at 106.79 yen, although resistance came in around its 50-day moving average at 107.44 yen.

The higher-yielding Australian dollar was steady against the U.S. dollar at US$1.0356.

Apr 19, 2012 10:53

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OctaFX.Com -EUR/USD Classical Technical Report 04.19

 

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EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Ultimately, any rallies towards 1.3300 should be well capped, while a break and daily close back under 1.3000 would accelerate declines to the early 2012 lows at 1.2660.

Apr 19, 2012 06:26

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OctaFx -AUD/USD Classical Technical Report 04.20

 

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AUD/USD: Our bearish outlook in this market is being reaffirmed with the latest pullback from the mid-1.0400’s and we continue to project deeper setbacks over the coming days and weeks back below parity. A fresh lower top now looks to be carving by 1.0465 but only back above 1.0640 would delay and give reason for concern. From here, look for a break and close back below 1.0300 to open the next downside extension towards 1.0000 over the coming sessions.

Apr 20, 2012 06:44

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OctaFX.Com -EUR/USD Classical Technical Report 04.20

 

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EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Ultimately, any rallies towards 1.3300 should be well capped, while a break and daily close back under 1.3000 would accelerate declines to the early 2012 lows at 1.2660.

Apr 20, 2012 06:51

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OctaFx - Germany sees upswing amid eurozone turmoil

Ifo index of business optimism indicates Germany economy is picking up speed after slow period

FRANKFURT, Germany (AP) -- A key index of business optimism on Friday reinforced what an increasing number of economists are saying: Germany is beginning to see an upswing — even as the rest of the 17-country eurozone struggles with economic and financial turmoil over too much debt.

The Ifo institute survey of business executives published Friday edged up to 109.9 points from 109.8 the month before, beating market expectations of a slight decline. That follows an unexpected fifth straight monthly rise Wednesday in the ZEW index, which measures the outlook among investment professionals.

Both are leading indicators, suggesting where the economy might be headed in the next six months. Economists say these and other data mean Germany may now have avoided a recession and this year will easily outpacing the eurozone as a whole, which is expected to shrink 0.3 percent this year.

Leading economic institutes this week raised their forecast for 2012 to 0.9 percent from a 0.8 percent prediction last fall, and predicted 2 percent growth next year. Some economists now think the economy grew in the first quarter as well, avoiding a second straight quarter of contraction after a slight 0.2 dip in the fourth quarter of last year. Two quarters of falling output is a technical definition of recession.

Both parts of the Ifo index — estimates of current conditions and expectations for the next six months — were up. Sentiment rose among both industrial firms, which are often oriented toward exports in Germany, and retailers, which depend on domestic demand. Economists say Germany's low unemployment rate of 5.7 percent is giving workers the confidence they need to spend money in stores.

"The German economy is showing itself to be resilient," said Ifo institute head Hans-Werner Sinn.

Germany is motoring ahead even as fears worsen about the eurozone debt crisis. Spain and Italy are seeing higher costs to borrow money on bond markets and roll over their debt loads, while their economic growth is sagging. Their troubles — which could mean big losses for shaky banks if governments can't pay — hold out a threat to the European and global economies.

High borrowing costs and fears of default have already pushed Greece, Ireland and Portugal to seek bailout loans from other eurozone countries. Greece additionally had to ask creditors to write down €107 billion in debt that it could not pay.

Germany is reaping the benefits of efforts begun in the early 2000s to cut labor costs for businesses — a reform effort that has now been taken up by Spain and Italy but which may need years to bring them higher growth. It is benefiting from its traditional strengths as an exporter of cars and machinery, and growth has been boosted by the recovery in the United States and strong growth in emerging markets such as China.

Ironically, in some ways the debt crisis has given Germany some help.

Because of the country's reputation for stability, investors are willing to buy its bonds as safe places to put their money. That means rock-bottom borrowing costs for the government, in contrast to the heavy risk premiums paid by Italy and Spain to borrow — costs that threaten to undermine their budgets and create a self-fulfilling default spiral.

A two-year bond sold Wednesday cost the German treasury only 0.14 percent interest yield, and a 10-year bond issue from April 11 yielded only 1.77 percent. With inflation at 2.3 percent, Germany's creditors are accepting no return on their lending or even paying for the privilege of lending it money. Rates are also low because the European Central Bank has reduced its benchmark to a lowest-ever 1 percent.

German economists say those rock-bottom rates are helping lower borrowing costs for companies as well, spurring business investment that is helping fuel the recovery.

Additionally, the crisis has kept the euro's exchange rate weaker than it otherwise would be, boosting exports. The eight economic institutes who produce a twice-yearly forecast for the government says that means German goods are cheaper in foreign markets than they have been for 30 years.

The institutes warned however against complacency. They say their economy remains threatened by any wider disaster in the eurozone because 43 percent of its exports go to other eurozone countries — and 20 percent to the five crisis-hit countries, Spain, Italy, Greece, Ireland and Portugal.

That means a substantial 12.3 percent of Germany's economy is based on trade with the eurozone — suggesting that a financial disaster among neighbors could easily spoil Germany's improving mood.

Apr 20, 2012 14:09

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OctaFx - Stronger U.S. data lift shares, dollar

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OctaFx - Stronger U.S. data lift shares, dollar

NEW YORK (Reuters) - U.S. stocks and the dollar rallied on Tuesday after data showed U.S. manufacturing grew in April at the strongest pace in 10 months, soothing recent worries about the economy.

Safe-haven Treasuries prices fell, while gold retreated from two-week highs as the data dampened speculation the Federal Reserve would adopt fresh monetary easing measures to boost growth.

The S&P 500 and Nasdaq Composite indexes soared 1 percent after the Institute for Supply Management said its index of national factory activity rose to 54.8 from 53.4 in March, exceeding expectations of 53.0.

"The American economy is not as weak as some may perceive, and although it has stagnated a bit here, the American economy is doing very well," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"The fly in the soup is Europe. You have to keep an eye on these bond markets, and as long as Spain and Italy stay below six percent in terms of bond yields, that is a green light to buy stocks."

The Dow Jones industrial average (DJI:^DJI) was up 116.02 points, or 0.88 percent, at 13,329.65. The Standard & Poor's 500 Index (MXP:^SPX) was up 16.37 points, or 1.17 percent, at 1,414.28. The Nasdaq Composite Index (NAS:^COMP) was up 36.61 points, or 1.20 percent, at 3,082.97.

The MSCI world equity index (.MIWD00000PUS) gained 0.5 percent to 330.35. Trading was limited with many markets in Asia and Europe closed for the May Day holiday.

World stocks posted a loss of about 1.5 percent last month as worries about global growth resurfaced after data showed the U.S. economy cooled in the first quarter and the euro zone recession was deepening.

The weakness has also spread to other countries as the British manufacturing sector barely grew in April, hit by the economic slowdown in the euro zone, while Canada said its economy unexpectedly shrank in February.

Adding to bullish sentiment were signs of recovery in Chinese manufacturing. China's Purchasing Managers' Index rose to a 13-month high in April, suggesting the world's second-largest economy has found a footing and may be recovering from a first-quarter trough.

AUSSIE TUMBLES

The Australian dollar fell nearly 1 percent against its U.S. counterpart after the Reserve Bank of Australia slashed rates by a deeper-than-expected 50 basis points. Domestic government bond yields hit 60-year lows.

The dollar rose 0.5 percent to 80.18 yen, rebounding from a low of 79.62, its weakest point since February. The stronger yen hit Japan's export-related equities, sending the Nikkei index (NIK:^9452) down 1.8 percent to a 2-1/2-month closing low.

The euro slipped 0.1 percent to $1.3225, off an earlier one-month high of $1.3283.

Light volumes were expected before Thursday's European Central Bank meeting, Friday's U.S. non-farm payrolls report and weekend elections in Greece and France.

Brent crude rose 32 cents to $119.79 a barrel while U.S. crude rallied $1.10 to $105.97.

Gold inched up to a two-week high and last traded around $1,664 an ounce.

The benchmark 10-year U.S. Treasury note was down 9/32, with the yield at 1.9488 percent. Benchmark yields, however, are still hovering at their lowest levels in nearly three months.

May 01, 2012 13:57

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OctaFx - Dollar gains vs euro, yen as U.S. data allays fears

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OctaFX.Com -Dollar gains vs euro, yen as U.S. data allays fears

NEW YORK (Reuters) - The dollar rebounded from a one-month low against the euro and a 2-1/2-month trough versus the yen on Tuesday after a key barometer of the U.S. manufacturing sector showed unexpected strength last month, assuaging concerns the economy was slowing.

The Institute for Supply Management's factory data bucked the trend of other recent data that suggested the economy was losing steam, prompting traders to rebuild long dollar bets that had grown stale as the economy's outlook weakened.

"The view on the economy has swung from optimism to pessimism of late and this could bring us back to the middle," said Nick Bennenbroek, head of FX strategy for North America at Wells Fargo in New York. "ISM suggests there's no real reason to get too concerned about the path of the U.S. economy at this point."

The ISM data, which showed the strongest rate of growth in 10 months, also downplayed recent speculation that the Federal Reserve will embark on a third round of bond buying to bolster the economy, lifting the appeal of the dollar.

In afternoon New York trading, the euro fell 0.2 percent against the dollar to $1.3218, retreating from a four-week high at $1.3283 hit earlier in the day.

"Once the euro rally lost momentum that led to massive interest in June euro $1.32 and $1.30 puts," said Matthew Schilling, a commodities brokers at RJO futures in Chicago.

"Those puts are showing the highest volume that I have seen in a while."

Investors who buy these puts expect the euro to fall below $1.30 or $1.32 before they expire on June 8.

Trade was thin, however, with many of Europe's trading centers closed for the May Day holiday. Light volume was expected before Thursday's European Central Bank meeting, Friday's U.S. non-farm payrolls report and weekend elections in Greece and France.

Against the yen, the dollar recovered from a more than two-month low, rising to a session high at 80.29 yen. It was last at 80.24 yen, up 0.6 percent.

Front-end volatility in dollar/yen remained under pressure despite the dollar hitting multi-month lows. On Tuesday, one- month volatility was at 8.35 percent, falling as low as 7.76.

Volatility curves in dollar/yen, however, are positively sloping, with back-month options still higher than short-dated ones - usually reflecting expectations of some stress. Ultimately, however, analysts said long-end volatility should decline as well because it has become expensive for investors to be on such a constant state of alert, given time decay.

The Australian dollar, meanwhile, was the day's biggest mover, falling sharply after the Reserve Bank of Australia slashed rates by a deeper-than-expected 50 basis points.

The Aussie fell 0.9 percent to US$1.0334 and slid to a three-month low near 82 yen.

"The RBA move means we no longer see a cut in June, but data in the coming months will be of particular focus in the wake of this rather unprecedented cut," TD Securities said in a research note.

May 01, 2012 15:09

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OctaFx - Euro clouded by Greece and Spain worry

LONDON (Reuters) - The euro fell close to a recent three-month low versus the dollar on Wednesday and the safe haven yen rose broadly amid worries over the impact on the euro zone stemming from political turmoil in Greece and the fragility of Spain's banking sector.

The euro remained under widespread pressure after the leader of Greece's Left Coalition party said on Tuesday that the country's commitment to a European Union/International Monetary Fund rescue deal had become null and void.

Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro.

Added to instability in Greece, French President-elect Francois Hollande has advocated an approach to tackling the debt crisis centered more on growth, which may create tensions with Germany's insistence on fiscal austerity.

Wednesday's moves suggest the political uncertainty is causing a broader retreat from risky assets. The New Zealand and Australian dollars, both sensitive to shifts in investor risk appetite, hit four-month lows versus the U.S. dollar.

"We still think the euro will head lower with $1.2950 the level to break in the near-term," said Lauren Rosborough, Senior FX strategist at Societe Generale, who have a medium-term target of $1.2500.

The euro fell 0.2 percent to $1.2980, closing in on a three-month low near $1.2955 touched on Monday. Technical analysts said the euro had found support on Monday around the 61.8 percent retracement of the it's 2012 rally at $1.2953.

The euro could fall towards $1.28-$1.29 over the next few weeks, although its drop is expected to be gradual given many investors are already short of the common currency, market players said.

Options traders said the euro may receive some support because of potential demand for euros related to option barriers at $1.2950 and below. The existence of such barriers means options traders might step in to buy the euro if the currency dips close to those levels.

Overall however the path for the euro was likely to be down. Added to the threat of a Greek exit from the euro, the bleak outlook for Spain's troubled banking sector continued to spook bond investors, pushing yields on Spanish 10-year bonds back above six percent on Wednesday. (GVD/EUR)

"In the next four weeks we should know who is controlling Greece, whether or not it runs out of money or chooses to adhere to its bailout terms and how the Spanish government plans to sort out its banking sector," said Kathleen Brooks, Research Director at FOREX.com.

"There are high levels of market risk associated with all of these events, which we believe is euro negative."

YEN IN DEMAND

A souring in investor appetite for risk gave broad support to the low-yielding yen which tends to rise when investors look to park their money in safer assets.

The euro was down 0.5 percent at 103.35 yen, while the Japanese currency climbed to a two-and-a-half month high versus the dollar of 79.61 yen on trading platform EBS.

The dollar itself remained supported against a basket of currencies by its own status as a safe haven, with the dollar index (.DXY) up 0.2 percent at 79.943.

The Australian dollar was down 0.5 percent to $1.0066, having touched a low of $1.0052 at one point, the lowest level in more than four months. The New Zealand dollar also touched a four-month low at $0.7842.

The Australian dollar fell below 80.20 yen at one point, the lowest level since January.

Implied option volatilities on Aussie/yen soared to a one-month high above 13 percent as market players scrambled to protect themselves against further declines in the Australian dollar.

May 09, 2012 11:02

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OctaFX.Com -Merkel says euro zone must stick to reform pledges

BERLIN (Reuters) - German Chancellor Angela Merkel reaffirmed on Wednesday that the euro zone must stick to previously agreed reforms on budget discipline.

Merkel is facing increased calls in the crisis-stricken euro zone to ease up on tough fiscal measures that have deepened a recession in peripheral countries such as Greece and to make reviving economic growth a bigger political priority.

"We both concur that in the euro zone we must stick to the program and the rules that have been agreed," Merkel told a joint news conference with Slovenia's Prime Minister Janez Jansa.

Echoing Merkel's tough line, Jansa said: "There is no 'either-or' when it comes to stability or economic growth. ... Such growth should not lead to higher public debts, which would not be good for future generations."

Slovenia is a member of the euro zone.

May 09, 2012 12:01

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OctaFx -Greek contagion fears send euro, shares lower

LONDON (Reuters) - Fears that a Greek exit from the euro zone will worsen the debt crisis facing other European nations gripped financial markets on Wednesday, sending shares and other riskier assets lower as investors shifted funds into safe havens like the U.S. dollar.

The euro dipped below $1.27 to a four-month low, the main index of top European shares, the FTSE Eurofirst 300 (.FTEU3), touched its lowest level for 2012, while U.S. stock futures pointed to a weak day on Wall Street.

The probability that Greece will leave the single currency rose markedly after political leaders in Athens failed on Tuesday to form a government, forcing another round of elections. Opinion polls show this is likely to be won by leftist parties opposed to the country's bailout deal.

In response, markets have moved to price in a Greek exit from the 17-member bloc, but are uncertain about the impact this will have on the rest of the region, while big investors have largely retreated to the sidelines, adding to the volatility.

"The idea that you can contain the spillover, the contagion, into the likes of Portugal, the likes of Spain, I just don't see that as being feasible," said James Ashley, senior European economist at RBC Capital Markets.

Peripheral euro zone sovereign bonds have taken the brunt of the selling pressure as some investors withdraw to safe havens like German government debt. Price moves were most pronounced in the market for insuring bonds against a potential default.

The Italian five-year Credit Default Swap (CDS) was 16 basis point (bpts) higher at 510 bpts in European morning trade, while the Spanish 5-year CDS widened 4.5 bpts to hit an all time peak of 546 bpts.

In the cash market moves were less dramatic, with 10-year Spanish bond yields easing to 6.35 percent after making big gains on Tuesday. The Italian equivalent debt was little changed at 6.01 percent.

The yield spread of all major emerging sovereign bonds over safer U.S. Treasuries however widened to be near 3-1/2-month highs of 386 basis points.

"The re-weighted probability of Greece leaving EMU has led to a sharp widening of government bond spreads, suggesting that long-term capital is leaving the periphery of Europe," Morgan Stanley said in a note to clients.

There were also signs in Athens that the prospect of a rapid devaluation of any new currency if the country leaves the euro was concerning ordinary Greeks.

Central bank head George Provopoulos told political leaders savers had withdrawn at least 700 million euros ($894 million) from the nation's banks on Monday.

The euro dropped to $1.2681 against the dollar putting it on track to test the January low of $1.2624, below which would mark the euro's lowest level since August 2010.

"The bias is still for a lower euro and a $1.26 target for mid-year looks pretty appropriate" said Jeremy Stretch, head of currency strategy at CIBC.

The dollar rose to its highest in four months against a basket of currencies (.DXY), while the euro also hit a three-month low versus the yen.

GROWTH IMPACT

The potential for a "disorderly" outcome, either directly from Greece leaving the euro or as related contagion worsens the already stagnant euro zone economy, has sent tremors through world equity and commodity markets.

Emerging market stocks as measured by the MSCIEF index (.MSCIEF) plunged 2.58 percent, with the index close to erasing all its year-to-date gains on its way to posting its biggest one-day loss in six months.

Weakness in Asian share markets sparked by the Greek crisis have already pushed MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> down 3.3 percent to a four-month low.

MSCI's global equity index <.MIWD00000PUS> was down 0.9 percent to 304.95 and is now up less than 2 percent for the year to date.

European shares were hit by a broad-based sell-off, with the FTSEurofirst 300 index (.FTEU3) down 0.7 percent to 990.54 points, having also dropped 0.7 percent on Tuesday.

Spain's IBEX 35 (.IBEX) fell 0.5 percent while Italy's FTSE MIB (.FTMIB) weakened by 1.7 percent.

Oil prices slid along with world shares and industrial commodities like copper in the general move away from riskier assets, but its fall was accentuated by a surprise build in U.S. crude inventories.

Brent crude was down $1.21 at $111.03 a barrel and U.S. oil was down $1.52 to $92.46 a barrel.

Brent crude oil fell to $110.82 cents a barrel and gold extended its losses to be down $13.34 at $1,530.76 an ounce, its weakest level since late December.

Gold gained nothing from flows into safe havens and fell for a fourth straight day to its lowest since late December as investors sold the precious metal to profit from the strength in the U.S. dollar.

Spot gold was down 0.6 percent at $1,534.54 an ounce, having dropped by nearly 3.8 percent in the last four days - its longest stretch of consecutive losses in nearly five months.

May 16, 2012 07:31

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OctaFx - Euro knocked by Greece worries, more losses likely

LONDON (Reuters) - The euro fell to a four-month low against the dollar on Wednesday and risked more losses on the prospect of prolonged political instability in Greece that could result in the country exiting the euro.

With Greece announcing fresh elections next month and investors concerned about the knock-on effects of a Greek euro exit for economies like Spain and Italy, investors fled the euro and sought the perceived safety of the dollar and the yen.

The dollar rose to its highest in four months against a basket of currencies, while the euro also hit a three-month low versus the yen.

The euro dropped to $1.2681 against the dollar on EBS trading platform, which left it on track to test the January low of $1.2624, below which would mark the euro's lowest level since August 2010.

However, it recovered to last trade at $1.2710, with traders wary of investors taking profit on hefty short euro positions which could send it temporarily higher. So far this month, the common currency has lost more than 4 percent of its value.

"There is a degree of magnetic attraction to the January low, but we may see a little squeeze higher before that," said Jeremy Stretch, head of currency strategy at CIBC.

"The bias is still for a lower euro and a $1.26 target for mid-year looks pretty appropriate".

The euro also fell to 101.904 yen before recovering to 102.18 yen.

Traders cited euro buying by hedge funds and institutional investors, but they said the broader trend for euro weakness remained intact.

Greek political leaders will meet on Wednesday to form a caretaker government to lead the country into its second election, likely in mid-June, after the failure of last-ditch negotiations to form a technocrat government.

"The uncertainty around the political situation in Greece continues to undermine risk appetite, which is affecting a range of currencies," said Paul Robson, currency strategist at RBS.

"There is uncertainty around the willingness of the euro zone paymasters to keep a country in the euro if it doesn't like fiscal austerity. It seems unlikely that Greece can back out of austerity and stay in the euro."

STERLING FALLS

Sterling underperformed other currencies after the Bank of England issued a weaker growth outlook in its quarterly inflation report while governor Mervyn King warned the turmoil in the euro zone posed a risk to the UK economy.

This helped the euro recover from a 3-1/2 year low against the UK pound, which also fell to a four-week low versus the dollar of $1.5889.

The dollar was broadly stronger as Greece worries left investors inclined to shun riskier currencies, with the dollar index (.DXY) rising to 81.573, its highest since mid-January.

It also performed well against the yen, rising to a two-week high of 80.45, roughly one yen above the 2-1/2 month low of 79.428 yen hit last week, and hit a four-month high against the Swiss franc of 0.9471 francs.

Risk aversion and worries about slowing global growth weighed on higher-yielding currencies like the Australian and New Zealand dollars, which fell to five-month lows against the U.S. dollar.

May 16, 2012 08:50

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OctaFX.Com -U.S. stocks rise on data, euro turns on Greek hope

NEW YORK (Reuters) - The euro pared losses and bond prices slid on Wednesday after comments by German Chancellor Angela Merkel bolstered hopes that Greece would remain in the euro zone, while U.S. stocks rose on encouraging U.S. economic data.

U.S. industrial production posted its fastest growth in over a year in April and a rebound in groundbreaking for new U.S. homes last month suggested a recovery in U.S. housing was gaining some traction, bolstering U.S. investor sentiment that has been heavily hit by news about Greece.

Industrial output grew 1.1 percent, the most since December 2010 and nearly twice the pace expected by analysts polled by Reuters. Housing starts increased 2.6 percent to a seasonally adjusted annual rate of 717,000 units, while March's starts were revised upward.

"Nice to see some turnaround. Ideally supply is getting more in line with demand, and low (interest) rates may be finally helping the turnaround," David Carter, chief investment officer at Lenox Wealth Advisors in New York, said about housing.

"However, this housing story is much smaller than news out of Greece and might get

easily forgotten," Carter said.

Stocks on Wall Street opened higher, while equity markets in Europe pared much of an early sell-off.

The Dow Jones industrial average (DJI:^DJI - News) was up 38.52 points, or 0.30 percent, at 12,670.52. The Standard & Poor's 500 Index (MXP:^GSPC - News) was up 6.00 points, or 0.45 percent, at 1,336.66. The Nasdaq Composite Index (NAS:^COMP) was up 10.66 points, or 0.37 percent, at 2,904.42.

The FTSEurofirst 300 index (.FTEU3) fell 0.2 percent to 997.22.

MSCI's global equity index <.MIWD00000PUS> was down 0.4 percent to 306.53.

Prices on German government Bund bond futures fell to a session low, while Spanish and Italian bond yields eased, with traders citing comments from Merkel reiterating that Germany wanted Greece to stay in the euro zone.

Bund futures fell to 143.11, and the benchmark 10-year U.S. Treasury note was down 11/32 in price to yield 1.81 percent.

Both Bunds and U.S. Treasuries have safe-haven appeal and their prices rise when investors become jittery.

The euro climbed to a session high against the dollar expectations that Germany and France will act together to keep Greece in the euro zone after Merkel met French President Francois Hollande on Tuesday. .

The euro pared losses to trade near break-even at $1.2725. The dollar (.DXY) rose 0.2 percent to 81.359 , its highest in four months against a basket of currencies.

Oil prices slid, accentuated by a surprise build in U.S. crude inventories.

May 16, 2012 13:58

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OctaFx -Greek euro zone exit unlikely, say money market traders

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Greek euro zone exit unlikely, say money market traders

BANGALORE (Reuters) - A slim majority of euro zone money market traders surveyed regularly by Reuters reckon Greece will still be in the euro zone at the end of 2013, a poll showed on Monday.

Fourteen of 22 euro money market traders said Greece would not abandon the euro either this year or next - an event once seen as unthinkable but is now being openly discussed as the country battles political and economic upheaval.

A summit of the G8 leading industrialized nations came down solidly in favor of a push to balance European austerity with a new dose of U.S.-style stimulus seen as vital to healing ailing euro zone economies.

The consensus among traders is in-line with a similar poll of economists taken last week, where a slim majority - 35 out of 64, said Greece would still be in the euro zone by the end of next year.

In the regular weekly survey, traders expect the European Central Bank (ECB) to allot 40 billion euros this week in its seven-day operation, a little lower than the 42.99 billion euros maturing from last week's.

May 21, 2012 13:01

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OctaFX.Com -Euro slides but may see short-term bounce

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Euro slides but may see short-term bounce

NEW YORK (Reuters) - The euro weakened against the dollar on Monday, weighed down by concerns about Greece and Spain's debt problems, although key technical signals and overextended bearish positioning suggested a short-term bounce.

Speculators who had piled up a record amount of bets against the euro cut some of those positions, rising from last week's four-month low and giving the currency a respite from this month's relentless selling.

The euro has fallen in six of the last seven sessions, down nearly 4 percent so far this month.

"Euro/dollar made an important double bottom and the positioning is definitely getting stretched," said Brad Bechtel, managing director, at Faros Trading in Stamford, Connecticut.

"Many will not shake out too much on the positioning given deep imbedded gains, but it is a currency that likes its double tops and bottoms, so we could be in a for a good-sized bounce."

In early New York trading, the euro fell 0.4 percent at $1.2734, well above Friday's low of $1.2640. A break below the nearby 2012 low of $1.2624 would take the shared currency back down to levels not seen since August 2010.

Bechtel said offers on the euro are thick above $1.2880 and above $1.2950.

"I ... still think it (euro) is a sell on rallies, not just against the dollar but also the yen," said Jeremy Stretch, head of currency research at CIBC World Markets.

"That 2012 low is still the target and the euro would need a catalyst for that. That could come if the informal (EU) leaders' meeting this week offers no consensus (on tackling the euro zone debt crisis)."

French President Francois Hollande and some other euro zone leaders are expected to promote the idea of metalized European debt at an informal summit in Brussels on Wednesday, although Germany reiterated its opposition to the idea on Monday.

The euro zone crisis has escalated since inconclusive Greek elections on May 6 raised questions over whether Greece will stay in the bloc. Concerns about the fragility of the Spanish banking sector have also weighed on sentiment.

The Group of Eight leading economies over the weekend, however, backed Greece to stay in the euro zone. The G8 countries also stressed that their "imperative is to promote growth and jobs," which means far less in the way of austerity measures that have plunged some euro zone economies into recession.

The euro drew little support from those comments, with investors viewing the statements as short on detail and long on rhetoric.

Overall, the focus on growth could mean far more involvement of the European Central Bank in terms of stimulus measures, analysts said, and a weaker euro.

Chinese Premier Wen Jiabao called on Sunday for additional efforts to support growth, but concerns about the slowdown in emerging economies remained.

RECORD SHORT POSITIONS

Investors dumped the euro in recent weeks with many seeking the relative safety of the dollar, the yen and even sterling.

The euro was flat against the yen at 100.96, having hit a 3-1/2 month low 100.219 yen on Friday.

The U.S. Commodity Futures Trading Commission said on Friday speculators' short euro positions climbed to 173,869 contracts, the highest on record, while their bets in favor of the dollar against other currencies also rose to a high not seen since at least mid-2008.

"The outlook for the euro is still extremely vulnerable," said Jane Foley, senior currency strategist at Rabobank.

"The market is getting a bit more optimistic ahead of the EU summit and looking for signs policymakers may announce some policies that will support the system. But they won't be able to solve the crisis in one fell swoop."

With sentiment fragile across global markets, investors preferred the safe-haven dollar, which rose 0.4 percent to 79.2 yen, well above a three-month low around 79.00 set on Friday.

May 21, 2012 13:35

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OctaFX.Com - Euro rises from 4-month low against dollar

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OctaFX.Com - OctaFX.Com - Euro rises from 4-month low against dollar

Euro rises from a 4-month low vs dollar even as worries about Europe's debt crisis continue

NEW YORK (AP) -- The euro is rising against the dollar despite ongoing concerns about Europe's debt crisis.

The euro rose to $1.2782 in afternoon trading Monday from $1.2737 late Friday. The euro hit a four-month low against the dollar on Thursday.

The euro has fallen about 2.5 percent against the dollar since anti-bailout political parties made gains in elections in Greece in early May. But Greek leaders weren't able to form a new government, so Greece will hold new elections next month.

Over the weekend, leaders from eight of the world's biggest economies meeting in Washington failed to create a plan to ease Europe's debt crisis.

In other trading, the British pound fell to $1.5798 from $1.5803. The dollar rose to 79.31 Japanese yen from 79.08 yen.

May 21, 2012 17:26

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Exclusive: Eurozone tells members to make contingencies for "Grexit"

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OctaFX.Com -Exclusive: Eurozone tells members to make contingencies for "Grexit"

BRUSSELS (Reuters) - Euro zone officials have told members of the currency area to prepare contingency plans in case Greece decides to quit the bloc, an eventuality which Germany's central bank said would be "manageable".

Three officials told Reuters that the instruction was agreed on Monday by a teleconference of the Eurogroup Working Group (EWG) - experts who work on behalf of the bloc's finance ministers.

"The EWG agreed that each euro zone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro," said one euro zone official familiar with what was discussed.

The news comes at a highly sensitive time, just hours before EU leaders gather to try to breathe life into their struggling economies at a summit over dinner on Wednesday.

Although minds will be focused by the prospect of Greece exiting the currency area, which has earned the monicker "Grexit" and is something policymakers say they want to avoid, disagreements over a plan for mutual bond issuance and other measures to alleviate two years of debt turmoil have already been laid bare.

In its monthly report, Germany's Bundesbank said the situation in Greece was "extremely worrying" and it was jeopardizing any further financial aid by threatening not to implement reforms agreed as part of its two bailouts.

It said a euro exit would pose "considerable but manageable" challenges for its European partners, raising pressure on Athens to keep its painful economic reforms on track.

Greek officials have said that without outside funds, the country will run out of money within two months.

For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not huddled beforehand to agree positions, marking a significant shift in the Franco-German axis which has traditionally driven European policymaking.

Instead, new French President Francois Hollande met Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit.

Despite fears Greeks could open the exit door if they vote for anti-bailout parties at a June 17 election, Spain, where the economy is in recession and the banking system is in need of restructuring, is at the frontline of the crisis, with concerns growing that it too could need bailing out.

After meeting Hollande, Rajoy said he had no intention of seeking outside aid for Spain's banks.

Hollande's election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth rather than debt-cutting now a rallying cry for other leaders.

That has set up a showdown with German Chancellor Angela Merkel, who supports growth but whose primary objective is budget austerity and structural reform.

At his first EU summit, Hollande has chosen to make a stand on euro bonds - the idea of metalizing euro zone debt - despite consistent German opposition to an idea that has been hotly debated for more than two years.

He will have support from Italian Prime Minister Mario Monti and European Commission President Jose Manuel Barroso, among others. But Merkel shows no sign of dropping her objections to the proposal, which she has said can only be discussed once there is much closer fiscal union in Europe.

The Netherlands, Finland and some smaller euro zone member states support her.

"Introducing euro bonds is the equivalent of ringing the bell for a happy hour so the inebriated can postpone their hangover indefinitely," one EU diplomat said.

NO MAJOR DECISIONS

No decisions will be made at Wednesday's summit, which is intended to promote ideas on jobs and growth ahead of another meeting at the end of June, but it is clear the debate will be intense, not just over euro bonds but over how to rescue European banks and whether to give more time to struggling euro zone countries to meet their budget deficit goals.

Officials tried to play down any prospect of a rift.

"This shouldn't be a tense discussion because it's a broad debate about propositions that are on the table. We are not there to negotiate or take decisions," a French presidential adviser said.

"Germany today is not firmly against euro bonds forever, and that's what makes a discussion possible. What is the time frame and what (budget) commitments would we require, that's what the discussion will be based on."

Having rallied on Tuesday, European stocks dropped 1.6 percent as investors priced in a lack of dramatic policy intervention. Spanish and Italian borrowing costs rose in turn.

A German two-year debt auction gave a stark illustration of how money is dashing for safe havens. Investors snapped up the 4.5 billion euros of paper on offer even though it came with a zero coupon - offering no return at all.

As well as exploring ways of resolving the sovereign debt problems that have torn the economies of Greece, Portugal and Ireland apart, the leaders will assess how to stabilize their banking systems.

Spain is a particular concern, with a number of its banks laden with bad debts from a property boom that turned to bust and still has some way to go before it touches bottom.

One proposal on the table is for the euro zone's rescue funds to be allowed to recapitalize banks directly, rather than having to lend to countries for on-lending to the banks.

But that is another idea with which Germany is uncomfortable, even though Merkel said on Tuesday a way should be found to dismantle banks across borders, a possible nod to a pan-euro-zone bank restructuring scheme.

With the euro zone registering no growth in the first quarter of the year and threatening to slip back into recession, the formal summit agenda is jobs and growth, with policymakers touting three ideas they hope will provide near-term stimulus:

- 'Project bonds' backed by the EU budget to finance infrastructure projects alongside private sector investment.

- Doubling the paid-in capital of the European Investment Bank, the EU's co-financing arm, to a little over 20 billion euros.

- Redirecting structural funds which tend to flow to poorer countries, to other areas where it might reap more immediate growth rewards.

Even if all three proposals were to be activated quickly economists and analysts say they will not provide a sufficient shot in the arm to the euro zone and wider EU economy.

"The hard truth is that there are no magic solutions to solving this crisis. We will all have to keep our spending in check, pay off our debts and swiftly introduce healthy reforms. This is what will kickstart growth," Dutch Prime Minister Mark Rutte said.

May 23, 2012 12:22

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OctaFX.Com -Euro slumps vs. dollar on Greek, Spain worries

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Euro slumps vs. dollar on Greek, Spain worries

NEW YORK (Reuters) - The euro tumbled to nearly two-year lows against the dollar on Friday, rattled by fears of a possible Greek exit from the euro zone and the risk other debt-plagued countries could also leave the bloc.

A plea from Spain's wealthiest autonomous region, Catalonia, for help from the central government to refinance its debt this year was the latest news to hit the euro, which was on track for its worst weekly showing in five months.

Catalonia's appeal reverberated across financial markets. Spanish and Italian bonds sold off, equities fell, and U.S. crude futures turned negative.

"The Catalonia news was a big deal because it implies that the Spanish government may have to take on more debt and it cannot afford to do so," said Richard Franulovich, senior currency strategist at Westpac Securities in New York.

"It looks like all the euros that were bought need to be resold. For now, it's all about contagion," he added.

In midday New York trading, the euro slipped 0.1 percent to $1.2525, after earlier falling to a nearly two-year low of $1.2495 on trading platform EBS, taking out a key options barrier at $1.25. That placed the euro on pace for its worst weekly performance since December.

The common currency has lost 5.5 percent against the dollar so far this month and is facing its fourth straight week of losses, raising the possibility of a test of the 2010 low of $1.1875.

Macro funds and institutional investors have ramped up euro selling after an inconclusive election in Greece left the country at risk of bankruptcy and a possible exit from the euro zone.

"I think markets are pretty complacent about a Greek exit," said Gabriel de Kock, executive director of FX research at Morgan Stanley in New York.

"Everyone says it's going to happen, but if it does, the Europeans will have to do extraordinary things to avoid contagion of the sort that could knock out Ireland, Spain and Portugal pretty quickly. So people are not ready."

Greeks vote again on June 17, with polls showing a close race between parties supporting and opposing austerity measures that are part of the terms of the country's international bailout, keeping markets on tenterhooks.

Investors are also concerned about the health of the Spanish banking sector, chances of a deep and damaging slowdown in the euro area, and the lack of any aggressive policy measures to address the escalating debt crisis.

Spanish lender Bankia (BKIA.MC), which was partly nationalized this month, was set to ask the government for a bailout of more than 15 billion euros (US$19 billion) on Friday, a financial sector source told Reuters.

Many strategists expected euro selling to continue next week, although heavy short positioning could slow the momentum.

"We have...a standoff where the market is short and the news is bad, and so we have tended to go down in stages," said Kit Juckes, currency strategist at Societe Generale.

"Although it's almost impossible to imagine a set of circumstances where we get good news, the pullbacks in this move down since the break of $1.30 have gotten really tiny."

Investor nervousness was well reflected in the options market, as euro/dollar one-month implied volatility hit 13.13 percent for a second straight day. It was last at 12.0 percent, well above its 50-day moving average.

With the euro under pressure, the dollar has been the chief beneficiary. An index that measures the dollar against a basket of major currencies edged up to 82.461 (.DXY), the highest level since September 2010.

Against the yen, the dollar was steady at 79.62 yen, supported by Tokyo importers and investors squaring positions ahead of a long holiday weekend in the United States. Sell offers around 80.00 yen were poised to cap any further gains, traders said.

The euro was flat against the Swiss franc at 1.2009 francs, having jumped to 1.20769 francs on Thursday, its highest level since mid-March on market talk the Swiss government is going to impose a tax on deposits and chatter that the Swiss central bank initiated a short squeeze in the pair.

Traders said the Swiss National Bank has been buying euros in the past few weeks to protect the floor at 1.20 francs, although some investors were still piling on bets through the options market that the peg will be breached in coming days if the euro zone crisis escalates.

May 25, 2012 14:00

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OctaFx -Insight: U.S. hedge funds find ways to trade euro misery

BOSTON/NEW YORK (Reuters) - Two decades ago, George Soros rose to fame and fortune on his now-historic trade in which he took on the Bank of England and shrewdly wagered on a devaluation of the British pound.

But it's unlikely the current European monetary crisis and worries about Greece's potential exit from the euro zone will give rise to an investing legend like Soros, who made $1 billion in 1992 by betting on a decline in the price of the pound.

Instead, there are a multitude of strategies to play Europe's troubles, and many different participants, according to U.S. hedge fund managers.

"There is not room for one player to have such impact," said John Brynjolfsson, whose California-based Armored Wolf hedge fund has been betting against the euro for quite some time. "Financial markets are so much bigger today."

A spokesman for Soros, who last year converted his Soros Fund Management to a family office and stopped managing money for outside investors, could not be reached for comment.

Brynjolfsson and several other U.S. money managers who are trying to profit from Europe's misery say they expect the current crisis to produce a lot of winners.

So far this year, the euro is down 3.3 percent against the U.S. dollar.

U.S. money managers say it's hard to swing for the fences the way Soros did because institutional investors are far more squeamish about having too much money riding on any single trade. There is also heightened sensitivity from pensions and endowments to taking an investment strategy that might spark political outrage from European leaders.

Another thing working against the rise of a new Soros is that trading the euro zone, or even the fallout from a Greek exit, is a much more complicated than betting against a single currency.

Money managers are playing the euro zone crisis by trading currencies, wagering on the direction of bank stocks or using derivatives like credit default swaps to bet on potential corporate and bank failures. Greenlight Capital's David Einhorn recently said he is bullish on gold and gold miners, in part because of concern about the fallout from a euro zone meltdown.

Some managers are even going both short and long on different European sovereign debt, depending on their views of the financial stability of different countries.

Adam Fisher, manager of the $320 million Commonwealth Opportunity Capital hedge fund, noted that Soros faced a "single country, not 17 different countries, one decision maker, not 17."

Fisher's fund, which has more than 80 percent of its money invested in Europe, is taking a somewhat contrarian position by owning the European sovereign debt of Germany, the Netherlands, Italy and Spain.

Hedge fund managers point out that given the up-and-down nature of the euro zone crisis, most hedge funds have been in and out of trades or forced to adjust positions depending on the changing political winds.

Earlier this year, for instance, it looked like concern about Greece exiting the euro had passed. But with the recent results of the Greek election at odds with the austerity measures demanded by its currency partners, the risk of a Greek departure from the euro zone has risen dramatically.

Recently, Fisher said his Los Angeles-based fund had reduced the size of some of its more bullish sovereign debt trades because he believes there will be "violent" market swings this summer.

"It is going to be incredibly difficult to manage risk through that environment," said Fisher, whose fund was up 8.8 percent through April. "I don't think hedging will do anything. The way you hedge, is you sell. You don't subtract risk by adding risk."

Brynjolfsson, a former top portfolio manager for bond mutual fund firm Pacific Investment Management Co, is betting on Greece exiting the euro. He said it will be hard for European leaders to take the necessary steps to appease the Greek government without infuriating politicians in other euro zone countries.

"As the wheels began falling off the bus, we adjusted to have a short bias and that has worked out," said Brynjolfsson, whose $750 million hedge fund is up 2 percent this year, largely on its short bet against the euro.

Axel Merk, president and chief executive officer of Merk Investments, an investment advisory firm that specializes in currencies, said the growing problems with Greece and the euro zone led him recently to dump all the euros in his $517 million Merk Hard Currency Fund, which is up 2.29 percent for the year.

Merk now favors the Singapore dollar, which has climbed 1.34 percent since January.

Ray Dalio's $120 billion Bridgewater Associates gained 23 percent in 2011 in part because of profits made from a series of European bets, said a person familiar with the Westport, Conn.-based fund who declined to discuss specifics of the strategy. In a recent interview with Barron's, Dalio said European banks "are now over-leveraged and can't expand their balance sheets" and European nations "don't have enough buyers of their debt."

Dalio may be the U.S. money manager who comes closest to rivaling the Soros of two decades ago. His hedge fund is the industry's largest and he widely regarded as one of the most successful managers.

Among the ways funds are playing the European turmoil, some are betting against the fortunes of Spanish and Italian banks instead of simply focusing on sovereign debt.

John Paulson, among others, bets against European sovereign debt as way to hedge the overall portfolio of his Paulson & Co hedge fund firm.

Daniel Loeb's Third Point fund put on a long position in Portuguese sovereign bonds in the first quarter because the New York-based manager believed the nation is in better shape than others in the euro zone.

"Portugal's debt profile is more consistent with Italy's than Greece's, its banks are substantially healthier than Spain's, and its government has enacted more aggressive labor reforms and is more stable than regimes in both countries," Loeb wrote in a May 16 investors' letter seen by Reuters.

If nothing else, the European crisis is forcing managers to keep coming up with new strategies to trade. One might say it's almost become an incubator for hedge fund managers to stretch their investment acumen.

Merk said he might look again at Europe if the political and financial situation gets more clarity. But he would likely do it a bit differently.

"If there is clarity in the process again, then we will certainly look at Europe again," he said. "But not through Greek debt, but through German bills."

May 28, 2012 06:04

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OctaFx - World stocks inch higher on Greek vote hopes

World stock markets inch higher as polls suggest Greeks prefer to stay in eurozone

MOSCOW (AP) -- European markets posted modest gains Monday morning after weekend opinion polls strengthened hopes that Greece might stick with the euro and austerity measures.

Investor sentiment remained fragile, however, with Spain's bond yields rising after the announcement of bailout plans for troubled lender Bankia. Trading volumes were also expected to remain low with Wall Street due to remain closed for the Memorial Day holiday.

The likelihood of Greece leaving the eurozone has been growing steadily since early May, when political parties opposed to the harsh terms of the country's financial rescue received unexpectedly high support in polls. The Greek exit would extend financial turmoil in the country and spread financial difficulties to other nations using the euro.

Surveys over the weekend showed that Greeks, while angry after more than two years of austerity measures that have produced lower pensions and higher taxes, still want Greece to keep the euro currency and not revert back to the drachma.

The May election results were so splintered that it left the country without a coalition government. Another election has been set for June 17.

Ric Spooner, chief market analyst at CMC Markets in Sydney, said it made sense for investors to remain subdued this far ahead of the election.

"The response has so far been very muted because these things could easily wax and wane over the course of the next two weeks," said Spooner. "One of the key drivers for investors will be trying to assess what the outcome of Greek election may be."

European stocks inched up Monday Morning. Britain's FTSE 100 and France's CAC-40 were both 0.7 percent higher, at 5,391.82 and 3,068.76 points, respectively. Germany's DAX added 0.6 percent to 6,388.88.

Moscow-based investment bank Troika Dialog warned in a morning note that "given the large number of very uncertain events on investors' watch list, any rebound will be modest."

Spanish markets declined Monday on bailout plans for troubled lender Bankia, sending its shares plummeting 21 percent. Spain's IBEX 35 was lower 0.6 percent at 6,500.7 in morning trading. Yields for Spain's 10-year bonds on the secondary markets hit 6.45 percent in morning — close to the key 7 percent rate beyond which long-term financing on the bond markets is considered unaffordable.

In Ireland, Prime Minister Enda Kenny made an appeal to voters to support the European Union's fiscal treaty in a referendum this week. Ireland's current EU-International Monetary Fund loans are due to run out by the end of next year, and only members of the treaty can access EU funds. Ireland is the only nation among 25 signatories putting the deficit-fighting treaty to a national vote. Ireland's benchmark ISE was up 0.7 percent at 3,113.34.

Wall Street will be closed Monday for Memorial Day, which typically results in subdued stock trading globally.

Asian stock markets closed modestly higher. Japan's Nikkei 225 index swung between gains and losses before settling 0.2 percent higher at 8,593.15. Hong Kong's Hang Seng added 0.5 percent to 18,800.99. Australia's S&P/ASX 200 rose 1 percent.

In mainland China, the Shanghai Composite Index climbed 1.2 percent to 2,361.37 and the smaller Shenzhen Composite Index shot up 1.4 percent to 948.42.

Later in the week, the U.S. government will release employment data for May, while China will release monthly manufacturing data. A private survey last week showed activity weakened further in May.

Benchmark oil for July delivery was up 89 cents to $91.75 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 20 cents to settle at $90.86 in New York on Friday.

In currencies, the euro rose to $1.2578 from $1.2518 late Friday in New York. The dollar fell to 79.36 yen from 79.66 yen.

May 28, 2012 11:58

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OctaFx -Euro falls near 2-year low as debt crisis widens

NEW YORK (Reuters) - The euro slumped to a near two-year low against the dollar on Wednesday with no relief in sight as Italian borrowing costs soared and concerns mounted over Spain's banking sector.

Selling accelerated after the euro broke beneath the psychologically important $1.25 level and option barrier at $1.24, opening the way for a slide toward the low $1.20 area. Real money and institutional investors stepped up selling on signs the bloc's debt crisis is spreading to larger economies.

"I think everybody was looking for an excuse to jump on the bandwagon for selling the euro," said Ravi Bharadwaj, market analyst at Western Union Business Solutions in Washington, D.C.

"The fear is that a lot of the imbalances that have been built up so far have been funded and financed by banks in Europe. As the different sovereign entities look to stabilize their financial systems, they are in effect just feeding a massive feedback loop."

Italy's funding costs rose sharply at a bond sale on Wednesday, with 10-year yields topping 6 percent for the first time since January. The Spanish equivalent neared the dangerous 7 percent level that had forced Ireland and Greece to seek bailouts.

The euro fell as low as $1.2384 on Reuters data, the lowest since July 1, 2010. It was last at $1.2402, down 0.8 percent on the day. Support now lies around $1.2150, a low touched in late June 2010, and then the 2010 low of $1.1875.

Adding to pressure on the euro were poll results showing Greece's radical leftist SYRIZA party has taken the lead over the pro-bailout conservatives. Greece is holding a national parliamentary election next month that may determine whether the debt-laden country stays in the euro zone.

The euro staged the short-lived bounce after the European Commission said the euro zone should move towards a banking union and consider eurobonds and the direct recapitalization of banks from its permanent bailout fund.

The jump in Italian and Spanish bond yields came a day after Egan-Jones Ratings cut Spain's credit rating, the agency's third downgrade of the country's sovereign rating in less than a month, citing the country's weak banks as the reason for the downgrade.

A government source told Reuters on Tuesday that Spain would likely recapitalize Bankia (BKIA.MC), which asked for 19 billion euros on Friday, by issuing new debt and possibly drawing cash from the bank restructuring fund and Treasury reserves.

"The euro is in an extremely vulnerable position and downside risks are very strong indeed," said Jane Foley, senior currency strategist at Rabobank. "The Spanish banking crisis has the potential to knock the stuffing out of the euro zone irrespective of the Greek election results."

"The issues for Spain are undoubtedly huge and most people are coming round to the idea that it will need to go outside of its borders for assistance. The longer it delays, the more the risk of a bank run."

The euro lost 1.5 percent against the safe-haven yen, taking it to a four-and-a-half month low of 97.73 yen. The dollar hit a three-and-a-half month low of 78.85 yen and was last down 0.7 percent at 78.94.

The dollar index (.DXY), which measures its value against a basket of currencies, rise to a 20-month high of 82.941.

Technical analysts said a monthly close about the 100-month average in the dollar index around 81.82 may herald a shift in the longer-term trend of the dollar and reverse a multi-year drift lower.

The dollar also rose to a 15-month high against the Swiss franc at 0.9696 francs on EBS.

The higher-yielding Australian dollar fell 1.2 percent to $0.9716, slipping towards a six-month low at $0.9690, after weaker-than-expected retail sales data underscored the case for interest rate cuts.

May 30, 2012 16:57

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It's your job to fix crisis, ECB tells governments

FRANKFURT (Reuters) - The European Central Bank on Wednesday put the onus firmly on euro zone governments to solve the bloc's debt crisis, dashing expectations it could take near-term action despite saying the currency area's economy was under increasing threat.

After the ECB left interest rates at 1 percent, President Mario Draghi said the bank was not open to trading with governments on the policy response to the crisis.

Increasingly alarmed by signs Spain's banking crisis is opening a new front in the debt crisis, some in financial markets had hoped Draghi would signal a readiness for the ECB to take fresh action if euro zone governments take bolder action.

Instead, Draghi said it was wrong for the ECB to fill a policy vacuum created by others and that there would be no quid pro quo between the central bank and governments.

"There is no sort of horse trading here," he told a news conference.

"Some of these problems in the euro area have nothing to do with monetary policy ... and I don't think it would be right for monetary policy to fill other institutions' lack of action."

The respite the ECB bought the euro zone early this year by injecting over 1 trillion euros into its banking system with twin 3-year loan operations (LTROs) has faded, with borrowing costs for troubled countries such as Spain soaring again.

Draghi played down prospects of any imminent third round of long-term money creation, saying LTROs and the ECB's dormant bond-buying program were instruments that are in place but temporary and "not infinite".

"The issue now is whether these LTROs would actually be effective," he said when asked about another round.

Draghi said the decision to leave rates unchanged was taken by "broad consensus". He said a few members, but not many, of the bank had wanted a rate cut.

The ECB has never before lowered its main refinancing rate below 1 percent. Berenberg Bank economist Holger Schmieding said it was an open question whether the ECB would cut rates in July.

"In addition, the ECB offered no hint today that it may re-activate its two most important non-standard measures, that is the 3-year long-term refinancing operations (LTROs) and the purchases of sovereign bonds," Schmieding said.

"This suggests that it would take a major further escalation of financial tensions for the ECB to go beyond a possible rate cut in July," he added.

Draghi said markets tensions had not returned to the levels of late last year, when the ECB offered the 3-year LTROs, and stressed the euro zone was far from facing a situation like the one after the collapse of Lehman Brothers in September 2008.

Although flagging the increasing threat to the currency area's economy, new ECB growth forecasts for 2012 were unchanged -- in a -0.5 to +0.3 percent range. The prediction for the following year was barely changed either.

"The economic outlook for the euro area is subject to increased downside risks relating in particular to a further increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy," Draghi said.

Markets were unsure how the ECB would react to a recent wave of weak economic data, knowing that the bank also wants to keep the pressure on euro zone leaders to tackle the crisis more effectively.

The euro was steady at $1.25 after the decision, Europe's benchmark stock market (.FTEU3) was up 2 percent after a recent steep fall.

DILEMMA

Jolted into action by Spain's banking crisis, EU leaders have started considering the form of economic union needed to make the bloc durable as well as more immediate measures to help Madrid.

But that end-game is still months or years away and in the meantime investors view the ECB as the institution with the firepower to keep the crisis in check.

"For the time being, the ECB is sitting on its hands as the bloc's economy and financial markets deteriorate further," said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

"The message from today's ECB meeting is a worrying one: any mutualization of euro zone debt is a long way off yet credible interim measures to shore up confidence will not be forthcoming for the time being," Spiro added.

In the run up to Wednesday's meeting, International Monetary Find chief Christine Lagarde said the bank had room to cut rates [iD:nL5E8H50YO]. Spain and other hard hit parts of the euro zone would also like the ECB to revive its bond buying program to provide them with cover while they undertake planned repairs to their economies.

Euro zone unemployment stood at a record 11 percent in April, business confidence has slumped and surveys of manufacturing have hit three-year lows, adding to conviction that the bloc's economy is set to drop back into recession.

The bank's dilemma is that if does too much, pressure for government action falls. Yet if it does nothing, troubled sovereign debtors could find it harder and harder to finance themselves or maintain confidence in the banks that have bought much of their debt.

Draghi said the ECB would continue to supply euro zone banks with all the liquidity they ask for at least until January 15 next year. It had said in October it would give euro zone bank unlimited access to central bank funding at least until July 10.

Before the crisis, the ECB allotted a certain amount in its refinancing operations for which banks had to put in bids. Since the crisis began, the ECB has extended the maturity of such operations to as long as 3 years and has lifted funding limits.

Most ECB watchers had expected it would keep its powder dry until after June 17 Greek elections and a crunch summit of EU leaders at the end of June, which Draghi and his colleagues hope will dispel any doubts about Europe's commitment to the euro.

There are also growing signs that a decision on a bailout for Spain's debt-laden banks will have been taken by the end of the month.

Jun 06, 2012 15:26

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OctaFx - Euro rises after ECB decision

Euro rises vs dollar after ECB decision; Atlanta Fed president says stimulus may be considered

The euro is rising against the dollar after the European Central Bank left its benchmark lending rate unchanged.

Some economists expected the ECB to cut rates to help ease Europe's debt crisis, but bank President Mario Draghi said it's also up to governments to come up with a solution.

Traders also sold the dollar on rising speculation that the Federal Reserve might launch another round of bond-buying to help the U.S. economy. Atlanta's Fed president said in a speech that monetary actions need to be considered.

Bond buying lowers interest rates, and lower rates can weigh on a currency by reducing the returns investors get from holding it. With a third round of bond-buying mentioned, investors sold dollars.

Jun 06, 2012 16:47

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OctaFX.Com -UK's Cameron, Obama urge action on eurozone crisis

UK's Cameron, Obama agree 'immediate plan' needed to tackle eurozone crisis

LONDON (AP) -- British Prime Minister David Cameron and US President Barack Obama have agreed on the need for immediate action to resolve the eurozone crisis.

Downing Street says the two leaders spoke on the phone late Tuesday ahead of the G20 summit in Mexico later this month, when world leaders will discuss Europe's financial woes.

A spokesman for Cameron said he and Obama agreed on the need for an immediate plan to tackle the crisis, as well as a longer-term strategy to secure a strong single currency.

Cameron is visiting Berlin Thursday for a student conference with Chancellor Angela Merkel and Norwegian Premier Jens Stoltenberg, where the eurozone crisis is likely to be discussed.

Cameron is pressing for eurozone countries to protect their currency with measures including greater fiscal burden-sharing among member countries.

Jun 06, 2012 17:46

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OctaFX.Com -Canadian Dollar Forecast Turns Bullish on USD Weakness

 

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Forex retail trading crowds are now their least short US Dollar (ticker: USDOLLAR) versus the Canadian Dollar since the USDCAD first crossed above the CS$1.00 mark. We unabashedly called for important USDCAD gains as crowds sold into rallies. Yet short positions are down 22 percent since last week while longs have risen 19 percent.

As with other US Dollar pairs, we believe that the Canadian Dollar stands to benefit as the USD itself looks likely to correct lower through short-term trading. (USDCAD losses)].

Jun 07, 2012 14:43

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OctaFX.Com - Merkel firmly behind euro, but will she act?

Germany's Merkel stresses commitment to saving euro, but will she act?

BERLIN (AP) -- Germany's Chancellor Angela Merkel has insisted repeatedly that "if the euro fails, Europe fails."

Now the crisis in the 17 countries that use the euro is coming back to the boil, with Spain admitting it needs help to rescue its banks and voters in Greece deciding whether to back a party that could pull out of the single currency. And all eyes are on economic powerhouse Germany to see what it will do to save Europe's union from collapse.

There's no denying Merkel's commitment to keeping the common currency together. But that doesn't mean she's ready to take the politically difficult measures many say are needed to save the day. She appears torn between freeing funds to rescue a wider European dream and pressures from her narrower power base at home.

Which way she turns will be critical to Europe's future — and the fate of the global economy.

The two sides of the leader who can make or break the common currency have been on prominent display at crucial moments of the crisis.

— As Europe's No. 1 budgetary hawk, Merkel was the architect last year with former French President Nicolas Sarkozy of a strict set of fiscal rules designed to put a lid on the chaos of too many governments holding too much debt.

— But she also has a pragmatic side. Notably, she has shown flexibility in signing up to rescue packages she initially resisted — starting with the initial bailout deal for Greece in mid-2010.

It's certainly in Germany's economic interests to ensure the euro has a future. Of Germany's €276 billion ($346 billion) in exports in this year's first quarter, nearly €110 billion went to other eurozone countries. The full 27-nation EU accounted for more than half of its exports. So Germany desperately needs a stable market close to home.

It's also clear that Europe needs Germany: The nation's GDP of €2.6 trillion is 30 percent larger than that of France, the second biggest eurozone economy, meaning Germany alone has the funds to bail out the struggling bloc.

Still, absent a threat of immediate disaster, Merkel has shown little sign of budging from her insistence that help comes with strings attached, that thrift is a fundamental virtue and that there's no magic wand to save the euro. At the recent G8 summit of leading economic nations at Camp David, Merkel cut a lonely figure fending off pressure from fellow leaders to ditch austerity and jump-start growth.

When the global financial crisis first flared in 2008, Merkel famously invoked the "Swabian housewife" — the traditional personification of Germany's prudent housekeeping named after a region in the southwest of the country.

"She would have told us a piece of worldly wisdom," Merkel said: "You cannot live above your means in the long term." The image stuck.

Polls consistently show Merkel at or near the top of the list of Germany's most popular politicians. Her hard line on the crisis has a great deal to do with that popularity.

Merkel led calls to saddle Greece with tough austerity measures, such as cuts in public sector pay and pensions, as part of its two multibillion-euro rescue packages. Germans see it as just desserts for years of profligate spending, while they kept their finances in order.

But the spending cuts have left the Greek economy mired in a deep recession. Angered by the seemingly endless pain, Greeks have turned away from the two traditional parties in elections last month. They voted instead for more radical parties that have vowed to pull the country out of its bailout and austerity agreements. This weekend Greece faces another election. And if it backs a radical left party that promises to ditch its bailout terms, it's hard to see Merkel allowing Greek aid payments to keep flowing.

That could lead Greece to default and force it out of the euro, a move into uncharted territory that could undermine the entire global financial system.

The threat has held little sway in Germany. A poll by the Forsa agency released last week found that 62 percent of Germans want Merkel to stick to her tough line on Greece. And they favor — by 49 percent against 39 — a Greek exit from the common currency.

"I think her commitment to keep the euro alive is very strong, but I think it's not that strong to keep Greece within (it)," said Carsten Brzeski, senior economist at ING in Brussels. "They would like to keep Greece in but ... if Greece wants to go out as a result of the elections, then so be it."

The fact is, the direct effect of a Greek exit on the German economy would be small. Germany's €1.2 billion of first quarter exports to Greece amount to only a tiny fraction of what it sold to Europe as a whole. But Brzeski argues that there are broader risks: there would be a probability of losing billions of euros in German-guaranteed loans for Greece and the heightened danger of bailouts to other troubled countries such as Spain and Italy if Greece pulled out, neither likely to go down well with Germans.

And Merkel faces increasing criticism abroad for over-emphasizing austerity, notably from her longtime partner in fighting the economic crisis: France, which has a new Socialist president. Francois Hollande has rapidly become one of the strongest voices among European leaders pushing measures to boost growth.

One of these measures has been "eurobonds"— jointly issued debt that could be used to fund anything and could eventually replace an individual country's debt. Eurobonds would protect weaker countries by insulating them from the high interest rates they now face when they raise money on bond markets. Those high interest rates are ground zero of the crisis: They forced Greece, Ireland and Portugal to seek bailouts.

In the face of such pressure, Merkel has already shown signs of her other notable trait: pragmatism. She has started to soften her tone lately on promoting growth, hinting she'd be willing to do more as long as it means deeper European integration in the long run.

And there is a possibility that she will make further concessions. Ahead of elections due in Germany next year, the center-left opposition — from which Merkel needs support for her cherished European fiscal pact to be approved by Parliament — has begun demanding pro-growth measures.

Merkel's coalition recently proposed fostering growth by increasing the capital of the European Investment Bank, a development bank that lends money for public projects, using existing EU funds more efficiently and implementing structural reforms — but no more stimulus money.

Concessions aren't likely to include Eurobonds any time soon. They're politically toxic to Merkel's center-right coalition, unloved by other prosperous countries and could run into trouble with Germany's highest court, which has guarded parliament's control over the German budget.

More feasible may be a so-called debt redemption fund along lines proposed last November by the German government's panel of independent economic advisers. That would see a country's debts above 60 percent of GDP transferred to a common redemption fund with joint liability. They would be obliged to pay them off over 20-25 years and would have to pledge part of their foreign exchange or gold reserves as security.

Germany's opposition backs the idea. Merkel's spokesman, Steffen Seibert, said last week that "significant constitutional and legal concerns" need to be discussed.

Merkel herself cautioned last week against expecting a revolutionary "big design" to emerge from an EU leaders' summit at the end of this month. She made clear that she is still playing a long-term game to strengthen the eurozone through more centralized control of how governments run their economies. That will provide little comfort to Greeks hoping for a quick resolution as they head to the polls.

"We need not just a currency union; we also need a so-called fiscal union, more common budget policies. And we need above all a political union," she said. "That means that we must, step by step as things go forward, give up powers to Europe as well."

Jun 14, 2012 06:42

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OctaFX.Com -Spain banks borrowed 324.6 billion euros from ECB in May

MADRID (Reuters) - Spanish banks borrowed a new record high of 324.6 billion euros from the European Central Bank in May, up from 316.9 billion euros in April, data from the Bank of Spain showed on Thursday.

The data reflected that banks remain largely shut of the interbank funding market as banks shy away from lending to each other in a worsening euro zone debt crisis.

Total net borrowing was 287.8 billion euros in May compared with 263.5 billion euros in April.

The data chime with figures from Portugal, where borrowing in May also hit a new record high of 58.7 billion euros.

Jun 14, 2012 08:13

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OctaFX.Com -Finance chiefs confront Europe's unfinished business

BRUSSELS (Reuters) - Euro zone officials are cautioning against expecting any quick action from the currency bloc's finance ministers when they meet on Monday to sort out the tangle of loose ends and disagreements left by last month's EU debt-crisis summit.

Banking supervision, the use of European Union bailout money, aid to Spain and Cyprus and how to deal with Greece -- together it could take months to finalize, despite pressure from financial markets for clarity on the details.

Leaders from the 17 nations sharing the euro reached a deal in the early hours of last Friday to give the European Central Bank greater oversight of the bloc's banks and to use the euro zone's rescue funds to reduce countries' borrowing costs.

But after going beyond what many diplomats, finance officials and investors had expected, critical elements were left vague. Time-frames may already be slipping and opposition is building in euro zone hardliners the Netherlands and Finland.

"You have a Finnish problem. You have a Dutch problem. You have a German problem too," said one euro zone diplomat, pointing to the reservations of those countries about what was announced at the summit and German Chancellor Angela Merkel's reluctance to help its partners without strict conditions.

"I don't see a package done by Monday. They will work until the end of July or the beginning of August on these things," said the diplomat, who is involved in preparations for the Eurogroup meeting of euro zone finance ministers.

The meeting's crowded agenda may hamper progress. Discussing an aid package for Spain's banks, dealing with a request from Cyprus for emergency help, and whether to ease the conditions of Greece's second bailout are also on the table.

Euro zone leaders have committed to ECB-led supervision for banks, which would then allow the permanent rescue fund - the European Stability Mechanism - to recapitalize banks directly, rather than having to lend to governments.

That is seen as a major concession to Spain, which has requested a bailout of up to 100 billion euros ($125 billion) for its banks, but does not want to see that money added to its national debt and possibly push it towards a sovereign rescue.

Leaders agreed to remove the ESM's preferred creditor status when it lends to Spain, to calm investors who were worried they would not be repaid the money they had already lent.

They also decided that the ESM and the euro zone's temporary bailout fund, the EFSF, can buy euro zone bonds at auction and in the open market to lower borrowing costs, with some conditions attached but without a full program.

POLITICAL PROBLEMS

In their summit statement on June 29, leaders told the Eurogroup of finance minister "to implement these decisions by July 9". That now looks optimistic and delays could test market patience.

Ministers will look at the mechanics of how it will work in practice on Monday, but much depends on the ECB's crucial role as supervisor, which will need to be grounded in European law.

It now falls to the European Commission to propose such legislation, which is not expected until at least September.

"It will take at least until the first half of next year to be implemented," said Douglas Renwick, a director responsible for government credit ratings at Fitch Ratings.

"This could run into political problems. The major banks are often national champions and governments have been quite protective of them in the past. The idea of ceding oversight to a European level is a politically painful step to take."

Despite the obstacles to the broad package outlined by leaders, the range of measures agreed allow some short-term action, and vocal opposition to euro zone bond buying in the Netherlands and Finland is unlikely to ruin those plans.

Finland has said it opposes bond-buying in secondary markets, because it considers such purchases to be ineffective.

In emergency cases, the ESM's treaty allows for decisions to be taken with an 85 percent majority, and the Netherlands and Finland only account for 8 percent combined.

"The ESM discussion is being complicated by politicians talking to their electorates, but I think there is a consensus to move ahead with what was decided at the summit," said another euro zone official, briefed ahead of the Eurogroup.

TOUGH TROIKA

If only things were so straight forward for southern Europe.

Greece's new Finance Minister Yannis Stournaras said on Thursday he had been warned to expect a tough time at the Eurogroup, having acknowledged Athens was off course on its pledges linked to a 130-billion-euro rescue.

Ministers will discuss the findings of the "troika" of the European Union, the European Central Bank and International Monetary Fund from their first mission to Greece since the June 17 election. Another mission is due to return later in July.

Greece's Prime Minister Antonis Samaras wants to ease the terms of the bailout, but that would mean more money for Athens.

"Even if the second program as it stands were fully implemented, it is not clear that market access could resume (in 2015)," said David Mackie, an economist at JP Morgan. "A third program seems likely in any event."

For Spain, ministers are unlikely to sign off formally on an aid package for its banks as they are still awaiting an expert report on the situation, despite expectations of a July 9 deal.

"If the euro zone is to survive it has to be more integrated," said Fitch's Renwick. "Further difficult political concessions will have to be made over the coming years."

Jul 06, 2012 09:35

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OctaFX.Com -US Dollar Inches Higher Ahead of NFPs; Japanese Yen Steady, Gold Lower

High beta currencies and risk-correlated assets have traded slightly lower against the world’s reserve currency, the US Dollar, ahead of the most important data release this week: the US Nonfarm Payrolls report for June. A significantly disappointing figure in May stoked expectations of a third round of quantitative easing from the Federal Reserve; and even though the Federal Reserve did not deliver on those hopes, as expected, there is speculation that another bombshell could reignite the conversation.

Meanwhile, some discouraging developments out of Europe have stunted any rebound in the Euro after the EURUSD broke out of its Symmetrical Channel to the downside in the wake of yesterday’s European Central Bank rate decision. As noted earlier this week, the performance of Italian and Spanish bond yields, especially on the shorter-end of the yield curve (in light of the two longer-term refinancing operations (LTRO), yields within the three-year umbrella are the most accurate gauge of funding stresses in the Euro-zone) have disappointed. The Italian 2-year note yield has risen to 3.733% (+10.3-bps) while the Spanish 2-year note yield has risen to 4.838% (+39.7-bps). The Italian 10-year note yield has risen to 6.015% (+6.3-bps) while the Spanish 10-year note yield has risen to 6.936% (+23.8-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:54 GMT

GBP: +0.12%

JPY: +0.05%

CHF: -0.10%

EUR: -0.12%

CAD: -0.14%

AUD:-0.28%

NZD: -0.29%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.05%See More

Jul 06, 2012 10:58

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OctaFX.Com -Stocks, euro slide on worries over U.S. jobs

NEW YORK (Reuters) - Stocks on major exchanges extended their losses on Friday and the euro hit 5-week lows after U.S. jobs data for June came in weaker than expected, fueling concerns that Europe's debt crisis is pushing the world's largest economy into low gear.

Prices of oil and copper fell along with those gold as the dollar surged amid a broad flight from risk.

U.S. and German government bond prices leapt, with investors seeking safe havens in U.S. Treasuries and German bunds.

The Labor Department said U.S. non-farm payrolls expanded by just 80,000 jobs in June, falling short of forecasts. A Reuters poll showed the market expecting a growth of 90,000 jobs.

The data raised pressure on the Federal Reserve to do more to boost the economy, and imperiled President Barack Obama's chances of reelection in November.

The 80,000 jobs added in June was "a poor number and a very political number and it will not sit well with the market," said Jeff Savage, regional chief investment officer for Wells Fargo Private Bank in the Northwest in Portland, Oregon.

"There is no question that the QE3 conversation becomes very alive in the coming days and weeks," he said, referring to a third round of quantitative easing since 2008 that markets were expecting from the Fed. The first two rounds of QE involved large-scale Treasuries buying, aimed at lowering long-term interest rates.

Futures traders added to bets that the Fed will keep short-term interest rates near zero until the end of 2014.

Fed fund futures, tied to the overnight lending rate between banks, ticked up after the jobs report, signaling traders see the Fed first hiking rates in the fourth quarter of 2014, either at its October or its December meeting of that year.

The Dow Jones industrial average (^DJI) was down 126.32 points, or 0.98 percent, at 12,770.35. The Standard & Poor's 500 Index (^GSPC) was down 13.36 points, or 0.98 percent, at 1,354.22. The Nasdaq Composite Index (^IXIC) was down 29.03 points, or 0.98 percent, at 2,947.09.

European shares fell further after the jobs data (.FTEU3), down nearly 0.8 percent on the day, having been 0.2 percent lower beforehand. World stocks <.MIWD00000PUS> fell 1 percent.

The euro extended losses to fall to a fresh five-week low against the dollar, sliding nearly 0.5 percent to $1.2332 after falling as low as $1.2317 earlier.

Monetary policy loosening by a trio of major central banks failed to impress investors on Friday, pushing Spanish borrowing costs back up to unsustainable levels reached before last week's EU summit took measures designed to ease pressure on them.

China, the euro zone and Britain all loosened monetary policy on Thursday, signaling growing alarm about the world economy. But to little avail.

The 19-commodity Thomson Reuters-Jefferies CRB index was headed for its sharpest loss in a week as oil and copper prices fell about 2 percent each.

Gold slid more than 1 percent in choppy trade as investors turned to the perceived safety of the dollar. The spot price of gold, which tracks trades in bullion, was at $1,588.19 from $1,604.33 at Thursday's close.

U.S. Treasuries' benchmark 10-year note yields were at 1.5559 percent, their lowest levels in four days. Safe haven German Bund futures hit a session high.

Jul 06, 2012 12:47

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OctaFx -Japanese Yen To Appreciate Further As BoJ Maintains Current Policy

Fundamental Forecast for Japanese Yen: Bullish

 

 

The Japanese Yen continued to appreciate against its U.S. counterparts as positive real interest rates in Japan increases the appeal of the low-yielding currency, and we may see the USDJPY track lower in the week ahead should the Bank of Japan preserve its current policy in July. Indeed, the BoJ is widely expected to uphold its zero interest rate policy, and there’s speculation that the central bank will continue to carry out its current asset purchase program as the board raises its outlook for the region.

Indeed, the BoJ raise its fundamental assessment of all the nine regions for the first time since October 2009 while presenting the quarterly Sakura Report and it seems as though the central bank will stick to its wait-and-see approach as economic activity starts picking up. Although Governor Masaaki Shirakawa maintained his pledge to purse ‘powerful monetary easing,’ it seems as though the central bank is becoming more upbeat towards the economy as the recent developments coming out of the world’s third-largest economy raises the prospects for future growth. Meanwhile, the Nikkei newspaper said that the BoJ may scale back on its 6-month operation and expand its shorter-term programs, but the central bank may see scope to inject additional liquidity into the system as the ongoing turmoil in Europe dampens the outlook for the world economy. BoJ Deputy Governor Hirohide Yamaguchi held a cautious tone while speaking in Tokyo earlier this week and said that excessive gains in the local currency would dampen private sector activity, and we may see the central bank try to talk down the Yen as it lowers the scope for an export-led recovery.

As the USDJPY threatens the ascending channel carried over from June, a close below the 20-Day SMA (79.56) would instill a bearish outlook for the pair, and the dollar-yen may continue to give back the rebound from 77.65 as the relative strength index fails to maintain the upward trend from the previous month. However, we may see the dollar-yen face sideways price action ahead of the rate decision as market participants weigh the outlook for monetary policy, and the outcome of the rate decision should generate a clearer picture for the USDJPY amid the mixed views surrounding the BoJ

Jul 07, 2012 02:02

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OctaFX.Com -British Pound Looks to FOMC Minutes, EU FinMin Summit for Direction

Fundamental Forecast for British Pound: Neutral

 

 

The British Pound remains sensitive to risk sentiment trends, with GBPUSD showing a firm correlation with the MSCI World Stock Index. In the aftermath of last week’s disappointing US jobs report and underwhelming stimulus efforts from the ECB and the BOE, this puts the spotlight on minutes from June’s FOMC outing amid hopes the Fed will deliver some relief. Although Ben Bernanke and company opted not to introduce QE3 last month, traders will be keen to gauge the degree to which such an option entered into the conversation to guide expectations for a possible expansion of the balance sheet to be unveiled in the coming months.

On balance, the utility of another QE program seems highly suspect. Indeed, with US Treasury yields already so low that after adjusting for inflation, real rates are in negative territory out to the 10-year maturity, it seems unlikely that a further push lower will materially encourage those not borrowing to do so. The Fed is surely not oblivious to the limitations of more QE, but it is equally sensitive to the fact that a strong signal against stimulus may trigger pandemonium across financial markets. That means the door to further easing is likely to be kept open, at least rhetorically. With that in mind, language perceived as increasing the likelihood of added accommodation is likely to boost risk appetite and with it the Pound. Needless to say, the inverse scenario is likewise the case.

Besides investors’ yearning for looser monetary conditions, the Eurozone debt crisis is set to return to the forefront as the currency bloc’s finance ministers convene for a meeting on Monday. The sit-down is expected see officials begin implementation of June’s EU leaders’ summit framework. While little is likely to be achieved on longer-term issues like joint bank governance and the expansion of EFSF/ESM bailout fund powers, the Spanish bank rescue is likely to figure prominently into the proceedings.

Details of the effort are expected to be ratified at the sit-down. The British Pound continues to be a beneficiary of regional haven flows at times of rising concern about the Euro area, meaning an outcome perceived as disappointing by investors may boost the UK currency.

Jul 07, 2012 07:10

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OctaFX.ComSpanish deal lifts shares, euro stays weak

LONDON (Reuters) - European shares inched up on Tuesday after the region's finance ministers made limited progress on measures to help embattled Spain, but the euro and commodities fell as signs of a sharp slowdown in China fuelled anxiety about the global economy.

The FTSE Eurofirst (.FTEU3) index of top European shares edged up 0.6 percent to 1036.40, after the euro area finance chiefs agreed a deal which will release 30 billion euros of bailout funds for Spain's troubled lenders by the end of July.

The euro zone ministers also decided to grant Spain an extra year until 2014 to reach its deficit reduction targets but made no apparent progress on how the bloc's new rescue fund, the ESM, will be used to help lower Madrid's elevated borrowing costs.

The euro fell 0.3 percent to $1.2280, slipping back in the direction of a two-year low of $1.2225 hit on Monday.

The euro's struggles saw the dollar index (.DXY), which measures the greenback against a basket of major currencies, climb 0.1 percent at 83.219, near a one-month high.

"With the (euro zone) finance ministers' meeting out of the way without proving to be a source of inspiration for risk assets, the focus of the market now turns to the German constitutional court," said Chris Weston, an institutional dealer with IG Markets.

The German court is due to give its preliminary ruling on complaints against the European Stability Mechanism (ESM) and the euro zone's fiscal compact, which could ultimately lead to a further implementation delay.

Spanish 10-year bond yields eased about 14 basis points on news of the deal to just under the crucial seven percent level widely seen as unsustainable.

The euro finance chiefs plan to reconvene in Brussels on July 20 to finalize the agreement, having first obtained the approval of their governments or parliaments.

"I think we have a long ways to go before we reach the stage at which policymakers will be ready to act, particularly as it relates to potential bond purchases in the secondary market," said Todd Elmer, currency strategist for Citi.

CHINA WORRIES

Meanwhile the world's second largest economy China sharply curtailed its levels of imports in June in further evidence that Europe's three-year debt crisis is dragging down economic activity around the world.

Demand for Chinese goods in June was also below its usual pace in part because the U.S. economy has also not fully recovered, a top Chinese customs official said.

Annual import growth was 6.3 percent in June, far short of the 12.7 percent forecast by economists and the 12.7 percent achieved in May. China's crude oil imports for June plunged to their lowest levels of the year from a record high in May.

The lackluster trade numbers came a day after data showed inflation in China eased further in June, giving room to the central bank to loosen its monetary policy to stimulate growth without stoking upward price pressures.

This is a busy week for Chinese economic data releases which culminates on Friday with second-quarter gross domestic product figures, which are expected to show the lowest growth in at least three years.

The latest batch of numbers sent share markets lower across Asia but left the MSCI world equity index <.MIWD00000PUS> largely unchanged at 309.50 after three days of losses.

Brent crude oil was down 1.7 percent at $98.60 a barrel after the data with worries over supply disruptions also easing as a labor strike in Norway's oil industry ended.

Gold prices edged down as the nervousness about global economic growth saw investors turn towards the dollar for safety.

Spot gold dipped $1.50 to $1,585.15 an ounce while the U.S. gold futures contract for August delivery edged down 0.2 percent to $1,585.30.

"The market is being a little pessimistic and cautious about the global economy, and investors are choosing the dollar as the top safety haven," said Li Ning, an analyst at Shanghai CIFCO Futures.

Jul 10, 2012 07:27

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OctaFX.Com -Euro Approaches 2-Year Low on French, Italian Production Concern

The euro declined to within 0.4 percent of its lowest level in two years versus the dollar as industrial production shrank in France and was forecast to fall in Italy as Europe's debt crisis undermined growth.

Europe's 17-nation currency weakened most against the yen among its 16 major peers after European Union Economic and Monetary Affairs Commissioner Olli Rehn said Spain will soon have to take additional measures soon to meet budget targets. The dollar strengthened versus most of its most traded counterparts as Asian stocks declined. Australia and New Zealand's currencies dropped after data showed growth in exports and imports slowed in China.

"The euro is going to stay quite weak, particularly against the U.S. dollar and the yen," said Joseph Capurso, a strategist in Sydney at Commonwealth Bank of Australia (CBA), the nation's biggest lender. "The euro zone is still in recession and it's probably getting even deeper."

The euro lost 0.1 percent to $1.2297 at 8:15 a.m. London time after sliding to as low as $1.2251 yesterday, the weakest since July 2010. The shared currency fell 0.3 percent to 97.62 yen. It touched 97.43 yesterday, the least since June 5.

French output fell 1.9 percent from a month earlier, Insee, the Paris-based statistics office, said today. April's production increase was revised down to 1.4 percent. Economists had forecast a decline of 1 percent in May, according to the median estimate of 21 forecasts in a Bloomberg News survey.

Jul 10, 2012 07:35

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OctaFX.Com -EU talks up Spanish banks package, markets skeptical

BRUSSELS (Reuters) - Euro zone ministers struggled to reassure financial markets on Tuesday that an aid package for Spain they outlined overnight will help stabilize the currency bloc - a task made all the harder by a German legal challenge to its crisis-fighting tools.

The ministers agreed early on Tuesday to grant Madrid an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings. They also set the parameters of an aid package for Spain's ailing banks.

The decisions were aimed at preventing the currency area's fourth largest economy, mired in a worsening recession, from needing a full state bailout which would stretch the limits of Europe's rescue fund and plunge it deeper into a debt crisis.

"There's no emergency here, there's a clear path towards stabilization," Luxembourg Finance Minister Luc Frieden said of the measures agreed for Spain. "The markets have to realize that the money is there, more money than is necessary."

But markets were disappointed the meeting did not offer more. The euro initially traded near a two-year trough against the dollar and hit a five-week low versus the yen, with sentiment edgy as the focus shifted to a German court hearing.

Germany's top court also will pick up the issue on Tuesday about whether Europe's new bailout fund and budget rules are compatible with national law in a process influencing not just how to tackle the euro zone crisis, but how much deeper European integration can go.

The hearing into complaints about the fund, the European Stability Mechanism (ESM), and fiscal pact may indicate how long the court will keep Europe on tenterhooks.

Anything more than a few weeks would mean a serious delay to implementing the ESM, which has already been postponed from July 1, and raise serious doubts about whether Europe will really get the extra firepower it needs to combat the crisis.

"A considerable postponement of the ESM (bailout fund) which was foreseen for July this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the euro zone's ability to make necessary decisions in an appropriate timeframe," German Finance Minister Wolfgang Schaeuble told the court/

At their meeting overnight, euro zone finance ministers did not agree a final figure for aid to ailing Spanish lenders, weighed down by bad debts due to a housing crash and recession, but the EU has set a maximum of 100 billion euros ($123 billion) and some 30 billion euros would be available by the end of July if there was an urgent need.

A final loan agreement will be signed on or around July 20, Eurogroup chairman Jean-Claude Juncker told a news conference.

Frieden, arriving for Tuesday's meeting of finance ministers from the broader 27-member European Union, said the 100 billion euros available to Spanish banks was much more than they needed.

In one key decision watched by investors, ministers agreed overnight that once a single European banking supervisor is set up next year, Spanish banks could be directly recapitalized from the euro zone rescue fund without requiring a state guarantee.

That fulfils an EU summit mandate to try to break a so-called "doom loop" of mutual dependency between weak banks and over indebted sovereigns, but represented a climbdown for hardline north European creditor countries.

"It is a very, very positive agreement," Spanish Economy Minister Luis de Guindos said on arrival for Tuesday's meeting.

KEY APPOINTMENTS

In a nine-hour marathon meeting ministers of the 17-nation euro zone also settled a series of long delayed appointments.

But they made no apparent progress on activating the bloc's rescue funds to intervene in bond markets to bring down the spiraling borrowing costs of Spain and Italy, which threaten to drive them out of the market.

The ministers reappointed Juncker as their chairman for a further term of up to 2-1/2 years, though Europe's longest-serving government leader said he intended to step down from the position at the end of this year or early in 2013.

They nominated another Luxembourger, inflation hawk Yves Mersch, to the vacant position on the European Central Bank's six-member executive board, and picked German Klaus Regling to head their permanent bailout fund, the European Stability Mechanism, due to come into force this month.

Regling had already set up and run the temporary European Financial Stability Facility which has funded rescues for Greece, Ireland and Portugal.

The Eurogroup ministers were tasked with fleshing out a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc's rescue funds to stabilize bond markets.

But differences persisted between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain.

On Monday, ECB President Mario Draghi endured at times hostile questioning in the European Parliament, notably from German, Dutch and Finnish lawmakers concerned at the prospect of European bank bailouts using taxpayers' money.

Tuesday's meeting will formally ease a deficit reduction goal that has forced Madrid to make punishing cuts that are exacerbating a recession.

SLIPPAGE

Spanish and Italian borrowing costs eased on Tuesday, with Spain's 10-year bond dipping back below the critical 7 percent level.

Spain's de Guindos spelled out to the euro zone ministers on Monday his government's plan for a package of up to 30 billion euros over several years through spending cuts and tax hikes that are due to be announced this Wednesday.

A source close to the Spanish government said 10 billion euros of cuts would come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.

The European Commission proposed in return easing Madrid's deficit goal for this year to 6.3 percent of economic output, 4.5 percent for 2013 and 2.8 percent for 2014.

European Economic and Monetary Affairs Commissioner Olli Rehn said Spain was expected to take additional savings measures very soon to ensure it meets its new targets.

The new targets may still prove hard to reach, according to a draft recommendation from European partners, loosening Spain's goals and demanding the country be subjected to three-monthly checks.

The figures highlighted Spain's dramatic fiscal slippage due to a worsening recession. Madrid was originally meant to cut its budget shortfall to 4.4 percent this year. Prime Minister Mariano Rajoy unilaterally changed the target to 5.8 percent in March before eventually accepting an agreed goal of 5.3 percent.

Ministers sought to project confidence in Spain.

"We are confident that Spain is (doing) and will do all that is necessary to overcome this crisis," said Dutch Finance Minister Jan Kees de Jager.

Jul 10, 2012 09:31

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