Intraday Market Thoughts Archives

An ugly fall in US consumer sentiment may be pointing to storm clouds on the US economic horizon. In Europe, bank stress tests were better than expected. Fridays CFTC report showed a sharp fall in EUR longs.

Market moves were relatively small on Friday. CAD was the top performer and AUD lagged. The S&P 500 gaining 0.6% to close out the week at 1316.

The preliminary reading on consumer sentiment from the U of Michigan fell to a dismal 63.8 from 71.5 (exp 72.5). Its the lowest reading since March of 2009, when the stock market bottomed.

We dont think markets fully appreciated the potential ramifications of such a low number, perhaps due to summer doldrums or its late-week release. This is historically a telltale indicator of consumer spending and the economic outlook. Its also among the best early warning signs of trouble. We arent overly alarmed because its only one number but unless its revised significantly higher and we start to see improvement in August, this is the first evidence of a potential double dip. Whenever the survey has been this low in the past, the US has been in a recession.

Some economists are pointing to worry about the debt ceiling as a cause but to us that sounds far fetched. Dysfunctionality in Washington is rampant and aside from some fringe talk about economic calamity and bounced cheques, we doubt the average American is frightened about not receiving a government cheque. To us, it sounds more like Wall Street economists are trying to find a positive spin because they are loath to downgrade Q3 forecasts (after badly missing on Q2). Goldman Sachs bit the bullet late on Friday cut its estimate to 2.5% from 3.25% and others are likely to follow.

European banks stress test anticipation led to a whirlwind of speculation and rumours but in the end only nine banks failed and 16 narrowly passed. The better-than-expected result spurred a short-covering rally in EUR/USD but the pair closed the day virtually unchanged.

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Other economic indicators were mixed. Industrial production climbed 0.2% compared to the 0.3% expected; core CPI fell 0.2% compared to -0.1% expected and the Empire Fed index hit -3.8 compared to the +4.2 expected.

As Kyle mentioned earlier, a shocker came out of Australia as Westpac Bank forecast the RBA will cut rates in December by 25 bps and introduce 100 bps of cuts by the end of next year. We have warned about risks to the Australian economy but this goes way beyond what we or the market is pricing in and would imply deep fall in AUD/USD (~10 cents).

Fridays CFTC commitment of traders report showed EUR longs cut to 12K from 43K but otherwise, most traders were opening positions against the USD. Yen positioning nearly doubled to 28K from 15K. Canadian dollar longs jumped to 15K from 7K. Longs in AUD, NZD and CHF also edged higher. The pound remains the only currency held net short against USD but it improved to -24K from -31K.

USD is slightly weaker since London open. S&P placed the US rating on

negative watch. Euro zone trade balance narrowed. Focus turns to

European Bank Stress test and later to US inflation, manufacturing,

industrial data.

USD is on the weaker side after S&P placed the US credit rating on

negative watch. S&P stated that there is a 50% chance of US losing its

AAA rating within 90 days. The rating agency noted that the risk of

default is still small but it is increasing due to political

stalemate.

On the data front, Euro zone trade balance has narrowed to EUR -0.6

bln from previous EUR -2.5 bln. Italian Trade deficit also came out

narrower than expected at EUR -2.41 bln from previous EUR -2.5 bln.

A significant risk factor today is the release of the results of

European bank stress test. Results should be published in early NY

afternoon (expected at 16:00 GMT). As previously noted, 26 out of 91

banks are expected to fail the test.

New York session is filled with news announcements today. June CPI is

expected to turn negative and print -0.1% (3.6% y/y). Core is expected

to increase by 0.2% (1.6% y/y). The Empire State Manufacturing index

is expected to recover to 4.5 from previous drop to -7.8. The

Industrial production is also expected to improve to 0.4% from 0.1%.

UoM Consumer Sentiment Index is due at 9:55 am ET and it is expected

to improve to 72.5 from previous fall to 71.5.

As we learned from Bernankes testimony on Wednesday, the FED is

concerned about slowing economy and reemergence of deflation. Negative

CPI print and disappointing manufacturing activity would increase the

likelihood of protracted slowdown and the need for an additional QE.

At the same time, Ben Bernanke on Thursday said that at this point the

Fed was not ready to pursue QE3.

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Investors await second Italy austerity vote and stress test results, Eurozone trade data, Bernanke backtracks on QE3 talk as S&P also warns on US rating, US CPI and industrial production. Westpak sees RBA rate cuts. We have new Premium Trades for Friday, including 2 on USDJPY.

As a rollercoaster of a week draws to a close the uncertainty that has been the hallmark of this trading week could well continue into the weekend. Todays release of Euro zone May trade data is likely to show that the monthly trade deficit seen in April is likely to have increased to 3.2bn, from 2.9bn. This however will probably take a back seat when compared to the main factors that have been driving events this week, when if all goes well, Italy will draw a line under a turbulent week by getting the final vote of its austerity budget through the lower house of its parliament, after it was ratified by the Senate yesterday.

There is a minor concern that a spanner could be thrown into the works by the opposition who declared earlier this week they would vote it down if it were made a confidence vote, which is precisely what the government has done. Italian bond yields continue to remain elevated and with 10 year yields still above 5.5%, nearly 60 basis points higher in the last 10 days, concerns about Europes third largest economy look set to dominate for some days to come.

Later this evening the results of the bank stress tests will be revealed and according to ratings agency Moodys up to 26 banks out of the 91 tested could well need some form of recapitalising if the tests are carried out properly. The truth is the number is unlikely to be anywhere near that, which throws into question as to how credible they are, just like the tests 12 months ago.

The fact is given the current paralysis at the heart of policy in the euro zone, a stringent test would throw up more questions than answers, given the lack of a current coherent strategy amongst EU leaders.

WESTPAC SEES RBA RATE CUTS in DECEMBER. The large Aussie bank makes a startling change of foeicast (according to MNI FX Bullets), expecting 100bps of rate cuts to start in December 2011 into end of 2012. Westpac explains: "while catalyst for the first rate cut is likely to come from offshore we do not expect it to be a one off. Interest rates are too high in Australia

given the state of the non-mining sectors of the domestic economy and a

downward adjustment is required".

The US dollar has pared back some of its recent losses after Fed chairman Bernanke toned down his comments about further policy stimulus, suggesting that with the economy in its current condition there was a question mark as to whether it would be appropriate. There still appears to be no progress with respect to the debt ceiling negotiations, despite Moodys warning on Wednesday night and overnight confirmation talk that S&P has followed suit. There is talk of about $1.5trn cuts that have been agreed by all parties but that President Obama is pushing for more. Treasury secretary Timothy Geithner has warned Congress that there is no way that the decision can be delayed.

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US economic data due out later today includes June CPI which is expected to fall back, while we also have June Industrial production as well as July Empire manufacturing and Michigan confidence data.

EURUSD is set to close the week above the 55, 100 and 200 week moving averages, highlighting the currencys technical ability to defy technical challenges in the face of the worsening Greek debt mess. We long speculated on the seriousness of the US Budget deadlock, which helped distract markets away from the Eurozone issues. Interestingly, Fed Chairman Bernanke damaged the USD on Wednesday by highlighting the implications of a US loss of its AAA credit outlook. On Thursday, however, realized he had to stabilize the US currency by giving lip service to inflationary dangers. But this was interpreted negatively by the markets to mean that any QE3 is far from imminent. See our Friday's morning PREMIUM TRADES here: http://ashraflaidi.com/products/sub01/ CLICK HERE to JOIN http://tinyurl.com/64k24pc

Broadly negative sentiment continued on Thursday as US lawmakers scramble to raise the debt ceiling. Overall moves were small; NZD and GBP led while AUD and JPY lagged.

In the second day of testimony from Bernanke he told Congress that the Fed wasnt "at this point" prepared to take further action on the economy. He also warned lawmakers that a failure to raise the debt ceiling would be "calamitous." His comments weighed on stocks and that pulled EUR and the commodity currencies lower. The S&P 500 fell 0.67% to 1309.

Sentiment was buyoed somewhat on talk that US lawmakers are getting close to a deal on the debt ceiling. Scattered reports suggest Republicans and Democrats have agreed to $1.5 trillion in spending cuts.

Economic news did not have a large impact. US June retail sales rose 0.1% compared to the 0.1% decline expected. Excluding autos, however, the numbers were disappointing. Initial jobless claims improved to 405K from 427K and beat the 415K consensus.

Forex market action was less volatile that earlier in the week. EUR/USD ranged from 1.4270 down to 1.4120 and closes the day mostly unchanged at 1.4140. Gold hit a record high of $1594 in Europe but slumped somewhat in North America.

Ashraf has returned from travel and shall unveil several new premium trades at approx midnight GMT.

The price action over the past two sessions has been choppy. Since

London open, the greenback was able to recover a large portion of

earlier losses. Series of downgrades continues. Italian debt auction

went reasonably well. Market turns to US Retail Sales.

After the huge USD selloff yesterday, on the back of acknowledged

possibility of QE3, the price is consolidating with slight USD

positive bias. Moodys downgrade of government guaranteed debt of five

Irish banks is putting some pressure back on the Euro. At the same

time, the feared Italian debt auction went rather well. Italy

successfully sold almost EUR 5 bln in debt but it will have to pay the

highest yield on record for the 15 year and even the 5 year reached a

yield not seen since 2008.

On the data front, Euro zone June CPI came out in line with

expectations at 2.7% y/y and core CPI printed 1.6% slightly higher

than May reading of 1.5%.

New York session starts at 8:30 am ET with June Retail sales that are

expected to decrease by -0.1% after dropping to -0.2% in May. Last

month was the first time since August 2010 that retail sales actually

contracted on monthly basis. Core Retail Sales are expected to grow by

0.1% from previous 0.3%.

The unemployment claims are expected at 413K and as long as we do not

see a move below 400K it is hard to imagine the economy improving.

Core PPI is expected to increase 0.2% in June.

Fed Chairman Ben Bernanke continues his testimony in Washington DC at

10:00 am ET. Yesterdays testimony sent USD sharply lower on remarks

that additional monetary stimulus might be needed should deflationary

risks reemerge. It is unlikely that todays testimony or the QA

session should reveal something new so the impact should be limited.

Italian bond auctions in focus ahead of Italy austerity budget vote, Fitch downgrades Greece, Moodys warns US as debt talks stall while Bernanke hints at QE3, US retail sales and jobless claims due, Gold and Swiss franc surge

Todays focus in Europe is likely to be the series of Italian bond auctions due later this morning with a range of maturities from 2016 to 2026. Given that this time last week 10 year bond yields in Italian paper were around 5% and now they are at 5.5%, albeit down from this weeks highs at 6.05%, these will be watched closely. The potential for failure here could be quite high, if there is any doubt about the conviction of Italian politicians to pass the austerity budget.

Given that Fitch downgraded Greece late last night three notches to CCC, following on the heels of Moodys downgrade of Ireland the night before, the stakes couldnt be any higher.

This mornings Euro zone CPI numbers for June are likely to be no more than a foot note when set against this backdrop, but are set to remain at 2.7% with core CPI remaining at 1.5%, highlighting the folly of the ECB in hiking interest rates last week.

Late last night ratings agency Moodys decided to invite the US to the downgrade party putting a rocket under the Democrat and Republican politicians as the talks on the debt ceiling appeared to be hitting the buffers once more. The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

Coming as it did on the back of Bernankes testimony to Congress where he gave the impression that the Fed would consider further QE if the economy continued to slow, the news sent the dollar into a nose dive.

The fact that further QE would be politically difficult to implement has been overlooked for now by the markets as the USs own debt problems get an airing in the market. Even so given the backlash the last stimulus package received at home as well as abroad, there has to be some doubt as to whether further QE would receive the support it would need.

The current weakness in the US dollar is not likely to play well with Japanese authorities and could make the current weakness extremely nervy and choppy, with intervention always a threat.

US retail sales for June are expected to highlight that the US consumer remains under pressure from increasing prices, while weekly jobless claims are expected to slip back slightly.

As would be expected safe haven assets gold and the Swiss franc have surged to record highs with more gains seeming likely.

QE3 is officially on the table. Bernanke testified that the Fed is prepared to take additional action if economic growth threatens to stall. The comments sent the USD spiralling and gold to a record. The upcoming session features New Zealand GDP.

Bernanke touched on further asset purchases as one of several options but ANY FURTHER STIMULUS WILL BE DOLLAR NEGATIVE. "We have to keep all the options on the table. We don't know where the economy is going to go," he said -- a comment that certainly doesn't inspire confidence.

The dollar was easily the G10 laggard and fell by more than 1% on several crosses. NZD, AUD and CHF were the best performers. This is traditionally an odd pairing of top performers but has become increasingly normal due to the stability and growth prospects of the threesome.

The euro rebounded alongside Italian bonds. As we warned, the situation in Italy is not on the same level as Greece or other periphery nations.

The S&P 500 closed up 4 points to 1317 after rising more than 1% earlier in the session. Brinksmanship on US debt ceiling talks further weighed on sentiment late in the day. House Speaker Boehner said it's a "crapshoot" that the debt limit will be increased if there is no agreement by Aug. 2.

The confluence of problems in Europe, Japan and the US have once again made left investors scrambling for a safe investment. And once again, they turned to gold and the Swiss franc.

Gold rallied for the seventh consecutive session to a record $1585/oz. Silver climbed 7% and looks as though THE BULLS HAVE REAWAKENED. Virtually every commodity in the CRB Index gained.

There is some talk the SNB could intervene to bring down the franc but we believe it is highly unlikely at the moment. The central bank took a huge loss on past interventions and deflation is not a clear risk.

Asia-Pacific Preview

At 2245 GMT, New Zealand finally releases Q1 GDP after two delays. The q/q reading is expected at +0.3% but the delays and February earthquake have caused speculation that it may be wildly off. In any case, expect the reaction to be limited because we are now two weeks into the third quarter.

At 0500 GMT, the Melborne Institute releases its survey on consumer inflation expecations for the next 12 months. The prior reading was 3.3%. The Bank of Korea has a rate decision at the same time but is widely expected to hold at 3.25% after a hike in June.

Keep an eye on Japanese policy makers as well. The yen lagged on Wednesday after Fin Min Noda said its moves have been "a bit one-sided," which is a threat of intervention.

Moody's Places US on Review for Downgrade

The US dollar is falling once again after a late-day announcement from Moody's that it has placed the US's Aaa rating on review for a downgrade because of the brinksmanship from politicians on raising the debt ceiling.

"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis. An actual default, regardless of duration, would fundamentally alter Moody's assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate," they said.

The good news is that this may add pressure on Republicans and Democrats to reach a compromise. At the moment, however, progress is virtually nil and the USD will increasingly pay the price with the deadline looming.

The greenback has been weakening since the London session started.

Euro short covering rally continues and reaches above 1.4100 despite

weaker data. Germany and Switzerland show lower inflation. UK labor

data was slightly worse. Bernanke reports to the House of

Representatives.

Equities, precious metals and high yielding currencies are off their

respective yesterdays lows. Euro is the relative strength winner as

short covering rally continues supported by slightly tighter

Italian-German 10 year spread. Euro ignored weaker May Industrial

Production that came out at 0.1% (0.5% exp.) from previous 0.2%

There were interesting developments on the inflation front. After

yesterdays lower than expected consumer inflation data from the UK,

German wholesale prices dropped in June -0.6% from a steady reading

month earlier (lowest print since 4/2009). Swiss PPI also showed lower

reading when it printed -0.5% from previous -0.2% (lowest since

8/2010).

News from the UK point to a weaker labor market as the Claimant Count

Change for June showed fourth back to back increase. The number of

people claiming benefits increased to 24.5K from 22.5K. The

unemployment rate kept steady at 7.7%.

New York session has only a few items that traders should watch out

for. At 10:00 am ET FED Chairman Bernanke delivers Semi-Annual

Monetary Policy Report and Federal budget balance is due at 2:00 pm

ET.

Members of the FOMC have voiced different views and concerns. Many

analysts have criticized the FED for not providing any specific

details about the exit strategy. Ben Bernanke will have the

opportunity to provide unifying view and explain when the Fed intends

to start reducing its treasury holdings. Yesterdays FOMC minutes

provided information about the steps the FED will take. Now, the

market will want to learn when it will take them.

The possibility of another round of QE was discussed during the last

FOMC meeting. USD bulls should watch carefully for any hints of QE as

the FOMC met before last weeks disastrous NFP reading.

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UK unemployment in focus after surprise inflation drop, Ireland downgraded by Moodys, Fed minutes showed policymakers remain uncertain about economic outlook, China slowdown fears ease, Japanese yen strength could prompt concerns about more intervention.

Yesterdays surprise fall in June inflation in the UK may well have come as a pleasant surprise to the Bank of England but it could well be only a temporary reprieve given the energy price rises in the pipeline. The fact remains that concerns about growth in Q2, as well as unemployment, continue to weigh in the central banks thinking and todays unemployment figures will be closely watched for any upward pressure in the jobless figures. Jobless claims are expected to have risen by 15k while the ILO measure is expected to have stayed constant at 7.7%.

Average earnings figures for the latest quarter will be closely scrutinised for any upward pressure on wages with expectations of an increase from 1.8% to 2.1%.

With the euro set to remain in the spotlight, yesterdays rebound from 4 month lows at 1.3840 was quickly knocked back by Moodys downgrade of Irelands sovereign debt to junk status with a negative outlook. With economic growth showing signs of slowing down euro zone industrial production for May is expected to have slipped back further from 5.3% in April to 4.8% in May.

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Last night's release of the latest minutes from the FOMC showed that policymakers remain divided on the best way to deal with the problems afflicting the US economy, with some favouring further easing and others leaning towards tightening. While the minutes did appear to outline an exit strategy for the recent stimulus program further clues about the US economy could come later today. This afternoons testimony by Ben Bernanke could give further clues as to the Feds thinking especially in light of last Fridays disappointing payrolls report. Expectations are that the chairman may well get a rough ride from the committee.

Chinas latest GDP numbers appear not to be as big a cause for concern as first thought in the face of recent tightening measures after Q2 GDP slipped back from 9.7% to 9.5%.

Industrial production and retail sales for June also showed no signs of slowing down, rising 17.7% and 15.1%, up from Mays 16.9% and 13.3% respectively. These figures, while above expectations show that growth remains robust, but do appear to raise some concerns that further tightening could well be on the way later this year, after last weeks rate rise.

Last nights yen volatility could raise concerns about further intervention given that it has started to gain both against the US dollar and on the crosses to levels last seen in March this year. SEE OUR USDJPY trade in the latest Intermarket Insight.

The FOMC minutes weighed on the dollars as the Fed took an incremental step toward QE3. NZD, AUD and EUR were the worst performers but the euro rebounded after officials talked down the possibility of Greek default. The upcoming session will be busy with the release of several key Chinese indicators.

The euro recovered from a three-month low after Luxembourg Fin Min Frieden said selective default on Greek debt is not an option envisioned by euro-region finance ministers. EUR/USD fell as low as 1.3837 but they rebounded back above 1.40. The euro fell again after Moody's cut Ireland's ratings by one notch to Ba1 from Baa3 and kept a negative outlook and now looks as if it will close around 1.3960.

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In the US, the Fed gave stocks boost as the FOMC minutes indicated some members are in favour of further stimulus (QE) if "growth remained too slow to meaningfully reduce the unemployment rate in the medium run." The S&P 500 fell 5 points to 1314.

The US trade deficit hit the highest in nearly three years. It hit $50.2 billion, well above the consensus $44 billion. The report points to a downgrade for Q2 growth estimates but some of the underlying metric were better than the headline suggested.

Asia-Pacific Preview

China is the focus on the upcoming session. A data slate will be released at 0200 GMT, including retail sales (exp: +17.0% y/y), industrial production (exp: 13.1% y/y) and second quarter GDP (exp: 9.5% y/y). Comments from Chinese Premier Wen on Tuesday have been parsed in differing ways. He said fighting inflation continues to be the top priority but he also warned against over-tightening because of the lagging effects of monetary policy. Some say the comments are hawkish but others (us included) note this is really the first signal of uneasiness about tightening from top Chinese leaders and are interpreting it as a sign that they don't plan to tighten for the remainder of the year. Chinese stocks certainly interpreted it this way as they climbed following the comments. Wen's comments may have also been a warning that GDP will be lower than expected. Given this, we see an upside bias in the market for commodity currencies; IE strong numbers would mean better growth/demand and weak numbers would mean no further tightening, and gov't efforts to stimulate growth. Either way, you could make a case to buy AUD, NZD or CAD.

Risk Off Environment Continues; UK CPI Lower; Market Turns To Trade Balance Data. Also see our LATEST TRADES below.

The Asian session saw a distinctly risk off environment with strong JPY, CHF and USD. Since London open markets have stabilized and trade slightly off their respective lows. UK CPI comes lower than expected. Eurogroup meeting fails to inspire. Market turns to US and Canadian trade balance data and to the latest FOMC minutes.

The Eurogroup meeting failed to calm the markets and inspire confidence. The major issue is that Euro zone leaders did not agree on any specific details. There was a talk that the EFSF would be expanded, maturities would be lengthened and interest rates would be lowered. All options are still on the table but no commitments were made.

Other troubling news include the Bank of Portugal downgrading its economic outlook stating that austerity measures will have a severe impact on growth and employment and also news printed in Spanish newspaper ABC that said that six Spanish bank will fail the Bank Stress Test.

Over the last few sessions markets have been focusing on Italy. The 100+ point bounce in EURUSD can be attributed to news that the Italian opposition calls for the approval of austerity measures in Senate by Thursday. Rare gesture of unity indeed.

On data front, UK June CPI surprised with a lower print. On monthly basis CPI printed -0.1% vs. +0.2% which translates to 4.2% y/y from last 4.5%. GBPUSD weakened significantly after the release of this news.

New York session starts at 8:30 am ET with May Current Account balance data for Canada and the US. Canadian Trade deficit is expected to narrow slightly to CAD 0.8bln from previous 0.9bln. The deficit has been widening each month over the past four months.

Majority of traders are likely to concentrate on trade balance of the US. May deficit is expected to increase only slightly to USD 44.1 bln from previous USD 43.7 bln. Last Saturday Chinese trade balance showed surplus that was much larger than expected (USD 22.3bln vs. exp. USD 14.1bln) so it is likely that US trade deficit will widen to reflect this.

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FOMC minutes from June meeting are due at 2:00 pm ET. The market will search for clues regarding monetary policy and the possibility of an additional round of QE or other type of easing (rate caps on 2-3 year or 10 year bond). The market will probably not react much to this event as most details were already covered in the press conference right after the rate decision.

USDJPY makes one of those typical recoveries after testing the 79 level but downside remains rooted for fresh losses due to the combination of prolonged USD worries and nervous global equities. Gold posts its first decline after 6 consecutive daily losses. EURUSD hovers above $1.39, with the 200 DMA & 200 WMA at less than 100 pips away, suggesting that $1.3880s may stand as the next key support. See our LATEST PREMIUM trade issued today titled "Fresh Double EURUSD Trade" http://tinyurl.com/5shvdbw To become a member, please a click here: http://ashraflaidi.com/products/sub01/

Europe discord threatens further euro losses, UK data set to show inflation steadied, while weak pound sees no change in trade deficit, German June CPI matches May's at 2.4%, Japan leaves rate policy unchanged, FOMC minutes.

Continued discord amongst EU leaders with respect to the best way to resolve the current crisis in Europe continues to undermine confidence in the single currency. Talk of voluntary private sector participation appears to have run into a cul-de-sac. With Germany refusing to guarantee peripheral bonds and the ECB refusing to buy them a solution looks a long way away.

As a result Spanish and Italian 10 year bond yields have surged to dangerous levels for both countries, 6% for Spain and 5.7% for Italy.

Hopefully todays resumption of the meeting yesterday will come up with something more tangible than the discord that saw the meeting break up last night, with a vague promise to enhance and improve the flexibility of the EFSF. This could be in the form of using bond buybacks to ease Greeces debt burden according to Olli Rehn.

UK inflation data for June is due out and is unlikely to offer much in the way of comfort to Mervyn King and his MPC cohorts with CPI expected to remain at 4.5%, with core at 3.3%. RPI is also not expected to slip back wither remaining at 5.3%. These figures will bring the inevitable call for a rise in interest rates and also bring about the response that a rise in rates would kill off any recovery. The weak pound isnt expected to have helped with respect to the May Trade balance data either with expectations that the deficit would remain around the 7.3bn mark.

Before the UK data, German CPI data for June was unrevised unchanged m/m, and rose 2.4% y/y from May's +2.4% .

The Japanese rate decision overnight didnt offer much in the way of surprises leaving rates unchanged, however it cut its growth forecast for the fiscal year to 0.4%, from 0.6% but was slightly more upbeat about its economic assessment as the economy recovers from the after effects of the March earthquake and tsunami.

In the US the May trade numbers are also expected to remain elevated, around $44bn, while the release of the latest FOMC minutes isnt likely to offer too many clues about future policy steps from this months Fed meeting.

The euro plunged Monday and sentiment wilted on talk of selective Greek default and an Italian debt crisis. EUR/USD fell more than 2 cents to close narrowly above a 2-month low. The upcoming sessions features the Bank of Japan`s interest rate decision.

USD, JPY and CHF were bunched near the top of the G10 leaderboard with EUR and NZD trailing. The S&P 500 fell 1.8% to 1319.

Several reports combined to crush the euro: 1) The FT reported that some European leaders would consider letting Athens default on some of its debt. 2) German newspaper Die Welt reported that the size of the EU bailout fund may need to be doubled to 1.5 trillion euros. 3) Rumours of sovereign fiscal strain in Italy and Italian banks.

We believe PROBLEMS IN ITALY HAVE BEEN OVERSTATED. On June 17, Moody`s said it may downgrade Italy`s Aa2 rating in the next 90 days. We have to envision that downgrades from Moody`s have caused an irrational rush to the exit because we fail to see significant risks from Italian sovereign debt. The nation is in nowhere near the same predicament as Greece, Portugal, Ireland or even Spain. There is talk of banking problems but we can`t imagine where they are arising from. Italian banks are extremely unlikely to be holding large-scale positions in periphery debt and domestic loans are performing.

Technically, the euro`s low from May 23 of 1.3969 (a three month low) is critical. Today the pair fell as low as 1.3985 but rebounded to close above 1.40. This is still the lowest close since late March.

Sentiment may continue to slide after ALCOA EARNINGS (ex-itesms) of 32-cents per share missed the 33-cent consensus. We note that revenue was higher than expected and initial comments from management did not cast doubts about the economic recovery.

The lone economic data point Monday was Canadian housing starts. They advanced to 197K from 194K and better than the 182K expected. The Bank of Canada also unveiled an optimistic and hawkish suvey of businesses. A RECORD LOW of 4% of firms surveyed expected to lay off worker in the coming year, while 57% expect to hire additional workers. the number of firms anticipating an inflation rate above 2% increased to 80%, compared to 46% six months ago.

The market continues to underprice the risk of a SURPRISE BANK OF CANADA RATE HIKE, or the possibility of a hawkish statement. None of Canada`s 12 primary dealers are forecasting a rate hike on June 19 and only half call for a rise at the subsequent meeting in Sept. Without question, the BOC would be hiking rates if the situations in Europe and the United States had unfolded more closely to expectations. Given the gyrations in sentiment, long CAD positions may be best expressed against fellow commodity currencies. Unfortunately, this doesn`t hedge out oil price volatility as crude fell 1.1% on Monday.

The upcoming session will be busy in the Asia-Pacific region. The highlight in Japan`s MONETARY POLICY DECISION. There is no set time but it`s generally released around 0200 GMT. Rates are assured to remain at 0.10%. The three meetings so far in the wake of the disaster have included further incremental QE and/or lending programs but no further action is expected here, although Nishimura is likely to renew his call for more asset purchases.

Earlier, at 2350 GMT, Japan releases its corporate goods price index and teritary (service) industry activity measure. At 0130 the National Australian Bank releases its measure of business confidence. The prior reading was +6.

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Attention shifts to Brussels and Eurogroup meeting as concerns about Italy mount, China inflation hits 6.4% and trade surplus widens, while aftershock from US payrolls shifts to start of earnings season and tomorrows FOMC minutes. Sterling rebounds ahead of inflation data this week.

With little in the way of economic data today the focus looks likely to remain on the ongoing situation in Europe with todays meeting in Brussels of euro zone finance ministers. Reports at the weekend suggest that EU leaders are beginning to think about ways of lowering the debt burden on Greece, though how this would be worked out isnt likely to take some form of shape for some weeks yet. Concerns about Italy remain as Italian regulator insists on full disclosure of short positions ahead of this weeks bank stress test results.

Concerns about the global recovery continue to weigh on investors this week after Chinas inflation rate jumped to 6.4% for June, while the trade surplus widened to $22.7bn, driven higher by a slide in imports as growth starts to slow and demand drops off. A 14.4% rise in food prices drove the rise in inflation which explains last weeks rise in interest rates.

On Friday attention briefly switched to the US and the extremely disappointing payroll figures for June, which came significantly lower than expected and have raised concerns about the sustainability of the current US economic recovery, amidst the backdrop of the stalemate between Republicans and Democrats with respect to the raising of the debt ceiling and fears of a possible US default.

Current market thinking is that policymakers will see sense and avert such a scenario, however politicians could well take it to the wire as each side looks to the other to see who will blink first.

Fridays payroll figures have raised expectations of further QE, however this seems unlikely given the current political deadlock and we could well see the Feds thinking with respect to this with tomorrows release of the latest FOMC minutes. With earnings season starting tonight with Alcoas results markets will be looking for any silver linings with respect to a rebound in risk after Fridays nasty surprise.

The pound was also be in focus this week, having rebounded on the back of European woes with both inflation and retail sales data due out, however it is likely that prices will continue to remain high and sales sluggish, especially given this weekends news of inflation busting energy price rises, this time from British Gas, starting next month.