A Weekend in Spain & China as Euro Avoids 6th Weekly Drop

EUR/USD will succeed in avoiding a 6th consecutive losing week by having to end the week above $1.2417. The last time EUR/USD posted six straight falling weeks was in February 2010 at the start of the Greek debt woes. The trading week ends on Friday, but market participants will keep an eye on the outcome of Spains aid request for its ailing banks as well as a flurry of key Chinese data following Thursdays surprise rate cut. Both are expected on Saturday. See more below on Gold, EURUSD, OIl-UK impact & those China data figures.

Wire reports that Madrid will request aid for Spanish banks remain unconfirmed. A conference call to discuss the request is said to take place on Saturday, followed by an official announcement on Saturday afternoon. The bailout chatter follows last nights decision by Fitch Ratings to downgrade Spain by three notches from A to BBB, while retaining a negative outlook. The downgrade took Spain out of the A basket by two rating agencies. The Fitch rating is now two notches above junk status.

The overnight slide in EUR/USD alongside other risk currencies emerged after the latest Fitch downgrade as well as market disappointment with Fed Chairman Bernankes testimony.

EUR/USD is fighting to avoid posting its 6th consecutive negative week. A close below $1.2400 would dampen chances of further extension in the current rebound. We continue to expect a recovery towards $1.26-1.27 ahead of the Greek elections and FOMC meeting before the downtrend is re-established gradually towards $1.23 and $1.18.

Particular attention shifts to Chinas weekend data following Thursdays decision to slash lending and deposit rates for the first time since the 2008 crisis. The data include reports on PPI, CPI, industrial production, retail sales and fixed-asset investment tomorrow. There is a concern that the interest rate cut was a pre-emptive action ahead of poor data showing.

Chinas May CPI is expected to slip back from 3.4% to 3.2%, a figure last attained February, which was the lowest since June 20102. Thus, a reading below 3.2% would reflect continued decline in food prices and open the door for further interest rate cuts ahead.

Chinas May retail sales are seen at 14.2%, from Aprils 14.1%, which was the lowest since January 2010. Further weakness among consumers would throw cold water on the need for China to step up consumption and help re-balance growth.

Falling oil blamed on plummeting UK input prices. May UK input prices grew by a mere 0.1% y/y, the weakest since September 2009 as input prices fell 2.5% m/m. The decline is attributed largely to the 15% decline in Brent prices in May. The downtrend in UK input prices and UK CPI is appearing eerily similar, which is another factor justifying fresh QE from the BoE as CPI eventually reaches the 2% target.

Gold shows more signs of posting its first losing year since 2000. The yellow metal is no longer advancing on eurozone woes, while rallying hesitantly during any hints of QE3. Golds hesitant gains despite falling bond yields reflects the ongoing fear factor (selling holdings to counter losses) as well as eroding confidence that any new quantitative easing may not be sufficient, hence the notion of diminishing returns voiced by Bernanke last year ahead of Operation Twist.

Golds recurring inability to surpass its 55-day moving average since mid-March highlights the lack of confidence among gold bulls. Gold broke below its four-year trendline support in early May below $1620, and is eyeing the next key support near $1525 (100-week MA), a technical level last breached in May 2008. A weekly close below $1520 risks extending losses towards the next major foundation, which lies at the 200-week moving average, now near $1260.

EURUSD longs and oil longs were stopped out, while AUDUSD longs remain in progress. FOR a FREE 1-WEEK TRIAL click here: http://ashraflaidi.com/products/sub01/

Ashraf Laidi