Europe continues ‘feel good’ story

15.35 AEST, Monday 2 July 2012

Europe continues ‘feel good’ story
By Tim Waterer (Senior Trader, CMC Markets)

The market liked what it heard from Brussels last week which has reduced the appeal of holding the safe haven US Dollar. The re-weighting of portfolios from a defensive bias towards a more pro-risk stance saw an exaggerated rise from higher yielding assets as Greenback positions were unwound. Crude Oil in particular was a prime beneficiary of the EU surpassing all expectations by putting a plan on the table. With US Dollar-buying now on the back burner the path to the upside for crude was cleared.

With the market momentarily finding a state of ease with the situation in Europe, the results of US economic data this week will either give traders reason to extend the rally initiated by the EU summit, or on the other hand potentially bring us back to square one if the numbers create US slowdown fears.

The US economy faces a stern examination this week with payroll data on Friday likely to reignite the QE3 debate if we see another result well under the 100k mark.

Under whelming Chinese data today (HSBC Final Manufacturing PMI coming in at 48.2) provided a slight hiccup for the Australian Dollar which was already showing signs of easing following the recent strong run. The AUDUSD rate faces some resistance at 1.0270 and this hurdle will need to be cleared before a break to 1.0325 can be achieved. Higher commodity prices should keep the commodity bloc currencies (AUD, NZD and Canadian Dollar) well supported this week.

The ASX200 commenced the new week in much the same positive fashion that it finished the last as traders continued to price-out the likelihood of a worst-case scenario in Europe coming to fruition. With some semblance of a structured plan coming from the EU, the ASX200 index has built some breathing space above the 4000 mark. However scope for further moves to the upside will be dependent upon the current ‘feel good’ story over Europe having some longevity. It could still turn out to be a ‘flash in the pan’ if Spanish yield prices start creeping higher again over the course of the next week.

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