Intraday Market Thoughts Archives

USD lagged for the second day but Fridays CFTC speculative data showed USD positioning shifting to the least bearish since January. Optimistic comments from the G8 helped sentiment and the Treasury opted not to label China as a currency manipulator. USDX closed the week back below its 55 dma.

The Swiss franc was the runaway best performer followed by the euro on Friday. For the week, CHF was the winner followed by NZD. The franc closed at record highs versus EUR and USD while NZD/USD hit 0.8198 a three-year high and just shy of the all-time record of 82.14. The kiwi was boosted by talk of Chinese investment in New Zealand bonds. The Canadian dollar was the worst weekly performer and was lower for the fourth consecutive week. EUR/USD closed at 1.4319, which is one pip below the 55 dma.

Fridays CFTC data showed the net short position in USD falling to $18.8 billion, the smallest since Jan. Net euro longs were scaled back to +19.1K from 41.6K. Three weeks ago positioning stood at +99K so its safe to say that position squaring has had a large downward impact on EUR in May and longs are now much less vulnerable. The dollar remains net short against every major except GBP which moved to -14.1K from -0.9K. By the same token, longs in CAD, JPY and CHF were scaled back while AUD and NZD longs increased. In the metals market, the speculative froth has been mostly chased out of silver with net longs hitting the lowest since May 2009. The data measures up to the close on Tuesday.

The S&P 500 gained 0.4% on Friday while gold and copper hit three week highs. G8 leaders helped sentiment as they said the global economy is strengthening, Obama promised deficit reduction and Europe pledged determination to fight fiscal problems. Fridays gains did not prevent the fourth consecutive weekly decline in stocks.

The US Treasury delivered its semi-annual report on currencies and did not name China a currency manipulator but warned it has made insufficient progress in yuan revaluation.

The U of Michigan consumer sentiment index was revised to 74.3 from 72.4, no change was expected. The measure of inflation expectations fell to 4.1% from 4.4%, which should give the Fed the comfort it needs to stay on the sidelines. US personal income growth was in-line at 0.4% while spending was a shade soft at +0.4% compared to the +0.5% expected.

Check out our six monthly technical charts on EURUSD, USDX, gold, silver, SPX-500 & Dow 30, their respective stochastics & RSIs and latest INTERMARKET TRADES w/ entry, stops & limits: http://ashraflaidi.com/products/sub01/access/?a=433

EURUSD is reluctant to close below its 55 dma for the 3rd straight week. Gold finally its 1534 and FTSE100 closes 40 pts away from our target. EURUSDs 200 week MA conspired with the 100 day at the 1.40 level to provide a vital foundation. Once our 1.4160 stop for EURUSD shorts was hit on Wednesday, we found the importance to turn the table and issue bullish forecasts for SPX, Dow 30 and FTSE100 (all of which are trades already in the money) We also include our alert on why euro bulls must avoid making the same mistakes we made back in November/December 2010 and not falling into the trap of false reversals. Click here for today's piece titled: Six Monthly Charts Cementing Our View http://ashraflaidi.com/products/sub01/access/?a=433

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The latest monthly charts analysis on USDX, EURUSD, Gold, SIlver, S&P500 and Dow-30 put things in perspective after a bruising month for equities and metals. But at the end of the day, these seem to be faring relatively well as they all close above key moving averages and trendlines. Here is the view for June as well as the latest trading ideas. EURUSD is attempting to regain its 55 dma at 1.4320s. Lack of agreement among Greek politicians pushed back the currency to 1.4230s but daily technicals remain positibe. Premium Members get FULL ACCESS to the MONTHLY CHARTS & TRADES here: http://tinyurl.com/3f6kgqx

Stops in EUR/USD and USD/CHF drove large moves in early Asia-Pacific trading as the dollar takes hits from all sides. Japanese inflation data was in-line with expectations and retail trade was on the strong side.

USD/CHF gapped nearly 100 pips lower to a record low of 0.8532 as broad dollar selling triggered stops. EUR/USD made an equally large move as it climbed to 1.4278. There doesnt appear to be any news underpinning the moves but there is talk of yield differentials and the disappointing GDP reading as continuing factors.

If the USD is to stage a rebound on Friday it may come from US legislators who are working on plans to cut down on regulation, reduce the cost of business and lower taxes. A story in the Washington Post details how policymakers are shifting into growth mode and we think its a theme that could gain traction in the day ahead.

April economic data from Japan showed y/y inflation increases for the first time in more than 2 years. The national CPI rose 0.3%, in-line with the consensus and above the 0.3% prior. The reading on ex food and energy was also in line at +0.6% y/y. Retail trade rose 4.1% in the month compared to the +2.6% consensus and -7.8% prior. The yen made small gains after the retail data.

Other news showed Chinese industrial profits rising 29.7% y/y in the first quarter compared to 32% in Q42010. In the UK, GfK consumer confidence UK improved to -21 from the -31 prior and -31 expected but the pound is lagging on dovish comments from the BOEs Posen.

In European trading, German regional CPI figures will trickle out throughout the day culminating with the national reading at around 1300 GMT. A flat reading is expected for April after a 0.2% rise in March. Trichets comments yesterday (see below) and a high reading may boost the euro on speculation of a late-Summer rate hike.

The USD slumped on Thursday after disappointing readings on GDP and initial jobless claims. The overall tone of markets was mixed with stocks flat, bonds rallying, copper higher and oil lower. This spilled over into fx where the odd combination of NZD, AUD and JPY were the top performers while CAD joined USD at the bottom of the pile. Japanese inflation and retail sales are the highlight of the Asia-Pacific session.

US GDP was unrevised at +1.8% in Q1, falling short of the +2.1% consensus. Weakness came from the important consumer spending component which was downgraded to 2.2% from 2.7% while some strength came from inventory building. The report and recent economic data show the US is in a soft patch. Expect to see Q2 forecasts downgraded to below 3.0%. Another headwind facing the US is employment as jobless claims hit 424K compared to the 400K consensus.

Stocks sold off initially but later rebounded into positive territory before closing nearly unchanged. The Treasury market interpreted the news more bearishly, pushing the 10-year yield below the 200-day moving average to 3.06%. A 7-year auction was also very strong. The bond market is flashing disinflationary and safe haven signals. Lower yields are a US dollar negative signal as long as growth in the US doesnt slow to the point where it will wound US trading partners. This may already be starting as CAD which was the G10 worst performer today on worries about its biggest trading partner and a small decline in oil.

Asia-Pacific Preview

Japan releases April CPI figures at 2330 GMT with a 0.3% y/y rise expected in the national reading but a 0.1% y/y price decline excluding food and energy. With Japanese inflation heading in the right direction, the risk of futher BOJ easing is diminished. Policymakers may, however, face pressure to act on economic weakness. Twenty minutes following CPI, retail trade is expected to rebound 2.6% after a quake-induced 7.8% fall in March. A reading close to zero will boost USD/JPY.

Coming up in today's Premium "Intermarket Insights" is a MONTHLY look at the key FX, commodity & equity landscape as we near the last trading day of the month.

Shortly after euro dropped on comments from Eurogroup Pres Juncker indicating that reluctant Ezone members would have to pay up in the event the IMF did not pay its next tranche of aid to Greece, the currency rebounds on the following: FX traders now referring to a WSJ story titled: "Trichet Signals ECB Rate Rise Isn't Imminent". Trichet stopped short of

Trichet stopped short of using code words of imminent tightening such as "strong vigilence", said the WSJ, but still noted that summer tightening remained likely. Markets News Intl (MNI) reported Trichet's Berlin comments earlier Thursday: "We are carefully monitoring the situation and we stand ready to do whatever is necessary to fulfill our mandate -- just as we have done over the past twelve and a half years." Trichet added: "This logic applies not only to our policy interest rate but also to the other measures we have adopted in response to the crisis". "Let me emphasise that our non-standard measures do not in any way impinge on our capacity to tighten our monetary policy stance in response to inflationary pressures." Subsribers of our Premium Product will have access to MNI's FX Bullets, a 24-hour stream of news, analysis & insights on FX/debt/commodities. Click here to subscribe: http://www.ashraflaidi.com/products/sub01/

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Risk appetite stabilizes after news that China showed interest in Portuguese

and New Zealand investment. Later, the London session showed indecision as price consolidated within unusually narrow range.

J.C. Trichet once again reiterated that ECB is monitoring price level and will do whatever necessary to avoid second round inflation effects. EURUSD did not respond much but the Spanish/German 10 year yield spread narrowed by 13 bps providing support for the euro.

In Switzerland, trade surplus increased from 1B to 1.52B but still came slightly below expected 2.0B and employment level q/q marked another slight improvement to 4.11 from previous 4.09M.

New York session will see eagerly awaited US Preliminary GDP q/q

released at 8:30 am EDT. Markets expect an improvement from last 1.8% to 2.2%. Given the rise in NFP and significant drop in unemployment seen over the past few months, the GDP data should not disappoint despite many, rather poor recent US economic releases.

Estimating whether USD will be able to resume its uptrend should the GDP data come as expected is difficult. Yesterday, the USD was not able to benefit from ongoing EZ problems and doubt inducing comments about Greek exit from EZ. Later, after the Chinese news, the greenback dropped sharply. This could be interpreted as diminishing USD momentum and possible change in bias.

GDP will steal the show but 8:30 am also marks the release of unemployment Claims that are expected to improve from last 409K to 403K.

The 5910 target on FTSE long has been hit (entry at 5840-55). The shorts wouldnt be stopped out until 5920. For more details on our Premium piece, click here http://www.ashraflaidi.com/products/sub01/

Euro among the strongest performers on Thursday after a report that China and other Asian investors will scoop up Portuguese bailout bonds next month. There were also reports China's sovereign wealth fund would investing in NZ assets, extending the boost to risk currencies such as NZD and AUD.

USD is the weakest major while the kiwi dollar sits atop the market as risk appetite returns. Switzerland and comments from Trichet will be the focus of European trading.

The FT is carrying comments from EFSF top exec Regling who said that Beijing is clearly interested in the 440bn rescue funds that will be auctioned next month. EUR gained on the comments but we see no reason to be chasing the market higher on this headline. The sale is for triple-A rated securities that are backed by the entire Eurozone. We feel the market is interpreting this as a Chinese vote of confidence in Portugal when its really an effort by the Chinese to diversify holdings in a virtually risk-free investment. If China were to invest in Portuguese govt debt or in other periphery countries, that would be a EUR buy signal with some staying power. CHina's CIC alsosaid to invest NZ $6bln in NZ assets.

The other theme of todays session is a return to risk appetite that has picked up steam from the US. The Nikkei is up 1.4%, the HSI higher by 0.5% and ASX 200 up 1.3%. Commodity currencies are predictably higher but economic data also helped boost AUD/USD a half-cent to 1.0582 as Q1 private capital expenditures increased 3.4% compared to the +2.8 consensus.

Focus Shifts to Switzerland and Trichet

European safe haven flows have pushed the CHF to record highs but the markets attention will shift to the strength of the domestic economy on Thursday. At 0615 GMT, Switzerland is expected to post a $2.05B trade surplus. An hour later, figures are expected to show the employment level at 4.1m in April compared to 4.085m in March. The trade balance will have a larger market impact especially if there is a sharp deterioration due to the strong CHF. This would hurt the franc on fears that we may see policymakers renew calls for FX intervention. Another event to watch for in Europe is a speech from Trichet at 0920 GMT.

SILVER HAS HIT THE $38.90 TARGET mentioned in Thursday's premium piece, where the entry was at 34.90/35.20. To subscribe to our Premium services, click on here http://www.ashraflaidi.com/products/sub01/

Wednesday's LONG TRADES IN SP500 has been executed with 1325 target hit, while the LONG FTSE-100 trade at 5840-55 has been executed. Tune in for Wednesday's piece for details on the limits & stops on this trade.

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Commodities rallied, stocks gained and major currencies were mostly unchanged on Tuesday despite a sharp fall in US durable goods orders. The euro rebounded after rumblings of a Greek euro exit appeared to be overstated. CHF was once again the top performer and it was followed by GBP, which gained on strong Q1 exports and an OECD report calling for higher interest rates.

Risk aversion kicked higher following the sharp drop in US durable goods orders. The declines were primarily due to a 30% fall in aircraft orders and a 4.9% slide in autos but the readings on other sectors were weak as well. Ex-transportation fell 1.5% and non-defense capital goods orders ex-air fell 2.6% compared to the -2.1% expected. Traders may have cast aside the report on seasonality after the March reading on non-defense capital goods ex-air transport was upwardly revised to +5.4%. There was also talk that Japanese supply disruptions were the primary factor.

We see the report as more evidence of a slowdown in manufacturing rather than something that can be ignored. The market may have been influenced by short covering and bottom picking more so than economic news. Several influential brokers also made positive commodities calls today and that inspired optimism about global growth. Oil climbed nearly $2 to $101/barrel and copper climbed 2.3%. The gains did not spill over into FX where the commodity block was flat. The S&P 500 up 0.3%, snapping three days of losses.

The euro sold off early in US trading but later recovered all its losses. The move showed that traders are clearly looking for headlines to sell the euro. Today it was European Commissioner Maria Damanaki who said Greece might be forced back to the drachma. The knee jerk selling dissipated as traders realized she is the European Commissioner for fisheries not exactly in the loop. The euro also climbed after Fitch said it is not planning a further downgrade to Greek banks.

Other news had little effect. The Feds Kocherlakota said he continues to favour 50 basis points of tightening and the US house price index fell 0.3% in April after a 1.5% decline in March (Exp: -0.5%).

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The major equity indices and key currency pairs such as EURUSD are hovering in and out of key moving averages such as 55 dma, 100 dma and 200 wma. EURUSD failed failed to regain after Greek officials mentioned the words "Greece" and "Eurozone membership" in the same sentence. Meanwhile, outperforms gold, attempting to break 38. Here are SEVEN TRADES from today's Premium "Intermarket Insights" http://www.ashraflaidi.com/products/sub01/access/?a=432

USD was already coming off its highs before the disappointment in US data, this time from an unexpected 3.6% decline in Apr durable goods, which fell below -2.6% expected). March durable goods orders were revised down to -4.4% from the prev reported -4.1%.

London session saw a slight improvement in sentiment as European equities opened weak but quickly recovered all their losses. USD is lower against most currencies, and even EURUSD could regain towards $1.4120s for now

Finnish parliament approved the participation in bailout of Portugal and Greek PM reiterated that he is determined to stay in EZ and seek political consensus. Despite these developments, the Euro has not been able to stage any kind of meaningful recovery.

The only relevant EZ news today - GfK German Consumer Climate came out at 5.5, slightly worse then previous 5.7. Consumer climate has been

gradually worsening over the past four months.

UK revised Q1 GDP came out at 0.5% as expected (1.8% y/y). Household Spending q/q has worsened to -0.6% which is the largest q/q fall since

Q2 2009. BBA mortgage approvals came out at 29.4K vs 31.2K, down 18% y/y. GBP is not paying attention to these numbers and is the relative strength winner. GBPUSD is currently trading around 1.6230; 100+ points off todays lows.

Commodity & FX traders await Crude oil inventories data that is expected to decrease from previous reading of 0.0M barrels to -1.6M barrels. Since February there have been only two instances of negative results. Negative reading would underpin oil and could give a boost to CAD.

A soft Richmond Fed continued the trend of manufacturing disappointments and undercut dollar gains in New York trading. The day ended with EUR, USD and JPY generally unchanged against one another. Japans trade balance is one highlight on a busy Asia-Pacific data calendar.

Overall market moves were small but the New Zealand dollar was the top performer as it continued to ride the wave from the quarterly inflation survey. The Richmond Fed fell to -6 from +10 in May; a reading of 9 was expected. In four months, the index has fallen to -6 from +25 and the slump is likely to continue with the forward-looking new orders reading falling to -15 from +10. The unexpected weakness in Richmond follows similar disappointments from the Philadelphia and Empire Fed indexes. The slump in manufacturing data has passed the point where it can be blamed on seasonality or distortions but its not at the point where its clearly slowing across the country. This is primarily because the negative surprises have not shown up in the critical Chicago Fed or national ISM manufacturing survey. Those are due out next week but a precursor comes in tomorrows April report on durable goods orders.

Along with manufacturing, overall sentiment continues to erode. US stocks posted a small loss and have now declined in six of the past eight sessions. JPMorgan cut its Q2 growth forecast to 2.5% from 3.0%. There may be some upside in spending but the consumer alone cannot float the US economy at this point in the cycle.

Wednesdays only other data point was new home sales, which climbed for the second month with a reading of 323K compared to the 301K prior and 305K expected. Sales remain sharply down from one year ago.

Shanghai Composite Index is expected to open on the upside, as it is 2.5% below its 200 day moving average, which is the farthest below the key average it has been since January. On a weekly basis, the index is below its 55 wma for the first time since, and will need to close above 2791. We are also watching the Hang Seng Index and the key 18854, which is the crossing point of the 55 and 200 wmas.

Trading during the London session has been calm with most currencies

slightly higher against the USD amid sentiment improvement. Latest data from EZ was mixed, market awaits US housing data.

German final GDP q/q came out as expected at 1.5% and German Ifo Business Climate for May was unchanged at 114.2, slightly higher than

expected 113.9. Klaus Abberger, Ifos economist, was quoted that

recent high euro volatility is a problem for German firms because it

makes it more expensive for companies to hedge their FX exposure.

EZ Industrial New Orders for May declined sharply from previous +0.5

to -1.8%. Data has been progressively worsening over the past quarter

which could be attributed to strong Euro seen from January to end of

April. Lower orders and comments about extra expense German firms have

to make when hedging could predict future weakness.

Euro has ignored these numbers and continued higher. After a brief

consolidation and return below the 1.41 news that the Greek opposition

leader Samaras rejected the austerity plan came out. Even though that

is not a surprising development, it could prevent further euro

appreciation.

In the UK, Public Sector Net Borrowing was lower at 7.7B from previous

15.6B. Analysts however expected borrowing to reach only 5B. Sterling

has not reacted to higher deficit news.

US data will be limited to New Home Sales and Richmond Manufacturing

Index both released at 10:00 am EDT. Over the past year, New Homes

Sales have stabilized but they still hover near decade lows. New Home

Sales is expected to increase slightly from 300K to 305K. Analysts see

Richmond Manufacturing Index that has been declining the past three

months unchanged at 10. Unless this reading surprises significantly,

the impact on the FX market should be limited.

Despite the stabilization that the housing market experienced over the

past year, situation continues to be dire. Given the importance of the

housing market on consumers confidence, there cannot be any serious

discussion about an improvement of the economy as a whole unless we

see significant multi-month improvement in the housing market.

Patrick Urban

UK banks are the latest in focus on talk of Moodys downgrade of banks and public finance data , ratings downgrades continue to weigh on Euro.

With the focus being on the single currency over the past few days the UK comes back into the spotlight this morning ahead of tomorrows Q1 UK GDP revision with talk that ratings agency Moodys is looking at downgrading the debt of Britains banks as the deadline for the withdrawal of UK government support draws near. With Chinese ratings agency Dagong downgrading the UK from AA- to A+, outlook negative the recent strength in sterling could well be tested once again.

UK public finance data out for April, is also due out and is expected to show public sector net borrowing to have fallen to 4.4bn.

As these figures will be the first of the new fiscal year, markets will be looking for evidence of an improvement from the previous April figures, as evidence that the governments fiscal plans are on track, with the new tax rises and spending cuts starting to bite in earnest.

Against the US dollar the pound has trend line support at 1.6070 from last years May lows at 1.4230, while against the single currency it appears that its is in a range between 0.8650/0.8850.

If ratings downgrades at the end of last week werent enough, ratings agency Fitch carried on the theme yesterday by downgrading the outlook to negative for five Greek banks, and then turned its gaze on Belgium, downgrading its outlook to negative, citing higher political risk due to its lack of a government.

Markets are now going to have to deal with political risk becoming a factor when thinking about sovereign debt as voter resentment could well derail fiscal austerity and bring about political instability and possible defaults. The fallout from this weekends Spanish elections could well be the shape of things to come.

In an attempt to keep the bond vigilantes at bay and inspire some market confidence Greece announced the sales of two of its ports, Piraeus and Thessaloniki, as well as Hellenic Postbank as part of a first wave of privatisations.

In economic data out later German Q1 GDP is expected to be reaffirmed at 1.5%, however given yesterdays disappointing flash PMI data there is a concern that IFO expectations for May, which are expected to come in around 107, could actually come in lower significantly lower than the April figure of 107.7.

US new home sales for April are out this afternoon and given recent poor housing data it wouldnt be too much of a surprise if this were to disappoint as well.

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By

USD the top performer, gaining more than a cent against AUD, EUR and GBP on Monday as risk aversion gripped markets. Key levels were breached or tested in several markets on a dimmed outlook for global growth. The upcoming Asia-Pacific session features data on New Zealand inflation expectations.

EUR/USD tested below 1.40 several occasions but rebounded to close near 1.4050. EUR/CHF fell to an all-time low. The latest slump came after Fitch lowered its outlook on Belgium to negative from stable. They said a downgrade from the AA+ rating is likely if official deficit targets are missed.

For more on the technical picture for EUR/USD and how Spain's soaring spreads technically stand out, see todays Premium Piece: http://www.ashraflaidi.com/products/sub01/access/?a=431

Fears about slowing global growth pulled the S&P 500 down 1.2% and below the 55-day moving average. It was the largest one-day decline in two months and is reminiscent of the past two quarters when stocks sold off following earnings season. US 10-year yields fell to the 200-day moving average at 3.08% but rebounded toward 3.13%. Ten-year yields in Greece and Ireland hit euro-era records.

Economic news was relatively light, especially in US trading. News developments are covered in previous IMTs but we would argue that the price action has more to do with the build-up in negative sentiment rather than anything new.

Despite the negative sentiment, the Canadian dollar was an outperformer and gained a full cent against its commodity cousins in Australia and New Zealand. The CAD resilience is difficult to explain given the $2.60 fall in oil and 3.5% fall in growth-sensitive copper. Canadian banks were closed for a national holiday and we may see some payback when they re-open on Tuesday.

**** AUDCAD trade has just been added to Monday's Premium piece ****

See last paragraph of today's piece http://www.ashraflaidi.com/products/sub01/access/?a=431

Asia-Pacific Preview

The regional calendar is somewhat bare so market participants should get a chance to digest some of the large price moves today. One notable release is the 0300 GMT report on New Zealand inflation expectations. Previous survey respondents called for a 2.6% q/q rise.

In Japan, cabinet ministers are holing a meeting and holding press conferences. We will look for hints at new economic initiatives to stem a slowdown that has been harsher than officials were expecting a month ago. Especially look for comments from Noda, Yosano and Edano.

By

As EURUSD tests below 1.40, find out how Spanish bond spreads are making the difference in weighing on Euro sentiment, unlike in the case of Irish, Portuguese, Greek spreads, which had short-lived impact. Today's premium Intermarket Insight shows the latest charting of these unfolding dynamics. http://www.ashraflaidi.com/products/sub01/access/?a=431

Negative Eurozone sentiment pushes the single currency down across the board. Earlier during the session market broke below the psychologically important 1.40 handle but has since recovered a portion of recent losses. PMI data came worse than expected.

EZ manufacturing PMI deteriorated to 7 months low after it fell sharply to 54.8 from the last reading of 58 and PMI services came out at 55.4 from previous 56.7. Market expected 57.6 and 56.6 respectively. French and German PMI numbers also disappointed and marked multi months worst readings. The exception was French services PMI that decreased only slightly to 62.8 from previous 62.9 which isstill near recent highs.

Little dose of confidence was injected to the markets when analysts from Moodys and Fitch rating agencies reaffirmed a stable outlook for Italy. Italian government is preparing a deficit cutting measures in response to last week cut in outlook to negative by S&P.

Since Friday EURUSD is down almost four cents. Euro represents 58.6% of the value of USD index so the recent fall in EURUSD helped USD index to break above the technically important area around 76.00. This resistance given by November 2010 low that coincides with 38.2% fib.ret. of the fall from 81.30 to 72.69 should now act as support. USD index is currently trading around 76.25.

Current USD strength is reflected in pricing of commodities that are trading near sessions lows, spot gold is holding slightly above 1500 USD/oz and spot silver trades at 34.75 USD/oz.

There are no data releases during the upcoming US session. Trading will be mainly determined by risk on/off sentiment and by technical ndicators. CAD traders should keep in mind that Canada has a bank holiday today in observance of Victoria Day. The liquidity is likely to be poor so trading within narrow range with occasional erratic movement is probable.

The daily "Intermarket Insight" will be published shortly, unveiling key distinct dynamics in Spanish bond spreads, which stand out from the other eripheral spread. for access to our premium section, click here: http://www.ashraflaidi.com/products/sub01/

Patrick Urban

Credit downgrades on Friday have once again sharply refocused investor concerns about the finances and solvency of the peripheral European nations after Greece was downgraded by Fitch to 'B+'; with a negative outlook, saying that an extension of Greek bond maturities would be considered a default. Italy laced on negative watch.

The timing of the downgrade on the back of Luxembourg PM Junckers comments that Greece may need a soft restructuring raised fears about a contagion of the European banking system, something the ECB quickly recognised when it said it was vehemently opposed to such a step.

Of bigger concern was S&Ps downgrade of Italy to a negative watch citing weak growth prospects as well as concern that political deadlock would slow down the pace of fiscal reform.

Both Italy and to a lesser extent Spain had been able to distance themselves from the bond vigilantes in recent months, however, the move by Standard and Poors and this weekends Spanish regional elections have put the spotlight firmly back on these too big to fail economies.

Indications suggest that the ruling socialists have lost significant ground as Spanish voters punish them for a spiralling unemployment rate and severe fiscal austerity in the face of rising debts and a falling housing market. It also raises the prospect that the government will struggle to implement further austerity measures if the need arises.

European economic data due out later is expected to show that the German and French economies continue to do fairly well with May PMIs expected to show only slight declines from Aprils fairly good numbers.

Also be aware that ECB officials will be talking today with Tumpel-Gugerell, Ordonez and Bini-Smaghi making speeches on the European economy.

EURUSD sees key support at 1.4000, the 200 week MA, while hitting fresh lows against CHF on safe haven flows.

USD stabilized on the back of these European concerns, while worries about the US debt ceiling have receded somewhat given that Congress has until 2nd August to thrash out a deal. A break of 76.00 on the US dollar index could well see a test 76.60 the 100 day MA.

Gold prices have soared on the back of these fiscal concerns in Europe rising back near to all time highs against the single currency, near 1,075 an ounce.

$1.4135 & $1.6220 targets in EURUSD & GBPUSD calls from Friday's premium piece were hit. See Friday's calls on gold & silver. More in depth analysis on these can be found in our Premium section - http://www.ashraflaidi.com/products/sub01/

By KM - AshrafLaidi.com Staff

Euro extends losses after Spains governing party lost municipal elections but the moves at the open have been small. Later, the Bank of Japan releases its monthly report. EURUSD hits the prelim target mentioned in Friday's Premium "Intermarket Insights".

EUR/USD hits $1.31 and NZD is also lagging as markets open. Spanish voters turned on the austerity programs of Prime Minister Zapateros Socialist party who won just 28% of voters. The polls point to instability in next years general election.

Traders are following news of the volcano eruption in Iceland because it may threaten European air traffic. A larger eruption last year halted flights for six days, cost $1.7 billion and weighed on the euro. The volcano is continuing to spew ash but so far experts are saying there is no threat to Europe. Icelandic aircraft have been grounded.

In the UK, the BOEs Dale remained hawkish in an interview with the Telegraph, saying rates need to rise but also warning that hikes will cut into household income.

At 0500 GMT, the Bank of Japan releases its monthly report of recent economic and financial developments. In Thursdays unanimous decision to leave rates at 0.10%, the BOJ stuck to forecasts suggesting a rebound in H2. Last month, the BOJ forecast GDP growth of 0.6% in the fiscal year and 2.9% next year. The CPI was forecast to rise 0.7% this fiscal year. Downgrades to medium and long-term expectation will weigh on risk appetite.

By AB - AshrafLaidi.com Staff