Major Currency Pairs Analysis: August 07, 2012

Italy’s Prime Minister Mont warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs as a standoff over European Central Bank help for Italy and Spain hardened. Monti, in an interview with Germany’s Der Spiegel magazine published said that disagreements within the 17-nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union. “The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe,” he added.

While he backed the ECB’s willingness to address “severe malfunctioning” in the government bond market, Monti said the problems “have to be solved quickly now so that there’s no further uncertainty about the eurozone’s ability to overcome the crisis.” Spain and Italy whose surging borrowing costs have shunted them to the heart of the turmoil in the euro area are resisting pressure from ECB President Mario Draghi to formally request aid in return for strict conditions before the central bank will buy their bonds.

Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan. The German government said for the first time that Chancellor Angela Merkel supports Draghi’s proposals.
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GBP/USD
U.K. house prices fell in July for the first time in three months, according to mortgage lender Halifax, adding to signs of weakness in the property market. Values dropped 0.6 percent from the previous month when they rose 0.8 percent, the mortgage unit of Lloyds Banking Group Plc said in a statement in London. In the quarter through July, values were unchanged compared with the previous three months, and now average 161,094 pounds ($251,500).

Policy makers are struggling to boost lending and kick-start a recovery after Britain’s recession deepened in the second quarter. The Bank of England will probably lower its outlook for the economy when Governor Mervyn King presents new quarterly economic forecasts on August 8, a week after officials started a Funding for Lending plan to increase credit supply. From a year earlier, U.K. house prices were down 1.3 percent in July, according to the Halifax index.

Right Move Plc, the operator of the U.K.’s biggest property website, said that the housing market “continues to be blighted by low transaction levels,” and recent data support that view. Nationwide Building Society reported a 0.7 percent decline in prices last month, and Hometrack’s Plc said values fell 0.1 percent as demand dropped the most in six months. Bank of England data show mortgage approvals fell in June to the lowest since December 2010.
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USD/JPY
Japan's leading economic index declined for the third consecutive month in June, and the rate of fall exceeded economists' expectations, preliminary data released by the Cabinet Office showed. The leading index which is designed to measure the direction of the economy in the months ahead fell to 92.6 from 65.2 in May. Economists were looking for a reading of 92.9. The latest decline was the third in a row.

The coincident index which measures the current economic activity dropped to 93.8 in June from 95.8 in the previous month. Meanwhile, the lagging index rose to 86.9 from 86.5, marking the second consecutive improvement, data showed. Japanese stocks gained, with the Nikkei 225 Stock Average rising the most in more than three months, after better-than-forecast jobs data in the U.S. eased concern growth is slowing in the world’s largest economy.

Toyota Motor Corp. gained after beating profit estimates. Canon Inc., a camera maker that gets almost 30 percent of its sales from the U.S., climbed 3.5 percent. Toyota rose 2.5 percent. Sharp Corp. extended its drop to a 37-year low on a report Hon Hai Precision Industry Co. plans to renegotiate its investment in the electronics company.

The Nikkei 225 gained 2 percent to 8,726.29 at the 3 p.m. close in Tokyo, the biggest gain since April 18. The broader Topix Index rose 1.6 percent to 735.73, with more than three shares advancing for each that declined.
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AUD/USD
Australia’s dollar traded 0.3 percent from its highest level in more than four months on bets the Reserve will keep borrowing costs unchanged. Interest-rate swaps indicate traders see an 86 percent chance the central bank will hold the overnight cash-rate target at 3.5 percent, and 26 of 27 economists surveyed by Bloomberg News predict no change.

Australia’s dollar slid 0.1 percent to $1.0557 as of 10:30 a.m. in Sydney from the close in New York when it reached $1.0593, the strongest since March 20. Australia has the highest benchmark borrowing costs among major developed economies. Policy rates in New Zealand, Norway, Sweden, Canada and the euro region range from 0.75 percent to 2.5 percent.

Rates in Japan and the U.S. are as low as zero. Demand for the South Pacific nations’ currencies was limited as technical indicators signaled their recent gains may have been too rapid.
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