(As written for My Paper on 3 July 2012. Click here to enlarge)
The end of the EU Summit in Brussels last week coincided with the end of H1.
In the 2-day Summit, European Union leaders agreed to loosen bailout rules, lay the foundations for a banking union and break the link between sovereign and banking debt through the direct recapitalisation of lenders.
Markets went into a bullish frenzy as the news was released. EUR/USD mounted a surge late in the week, climbing over 250 pips to hit a high of 1.2692. The big three commodity currencies – the Aussie (AUD), the Kiwi (NZD) and the Loonie (CAD) also climbed higher before the end of the week.
Spain’s 10-year bond yield dropped 61 basis points to 6.33 percent and Italy’s 10-year yield slid 38 basis points to 5.82 percent. This is considerably lower than the danger zone of 7 percent.
The MSCI All-Country World Index climbed 3 percent on Friday, the most since November 2011, while the Standard & Poor’s 500 Index advanced 2.5 percent to cap its best June since 1999.
There are three major takeaways from the EU Summit:
- Cash – a growth package worth 130 billion Euros and a financial tax would be setup to pay for future bailouts.
- ESM – The European Stability Mechanism (ESM) loan to Spanish banks will not have senior creditor status. This takes pressure off the country’s credit spread, and could boost the confidence of private investors. The ESM will also be allowed to directly recapitalise banks once a supervisory body is setup. This ensures that rescue funds won’t be added to the country’s debt.
- ECB – The European Central Bank (ECB) will act as an agent for the funds in market operations.
EU Summit aside, the median average of 57 economists in a Bloomberg survey expect the ECB to trim its key interest rate by 25 basis points when they meet on 5th July. The interest rate has been held at a record low of 1 percent since December 2011. Historically, this rate has never been below 1 percent.
Top News This Week
USA: ISM Non-Manufacturing PMI. Thursday, 5th July, 10pm. I expect figures to come in at 53.1, (previous figure was 53.7).
USA: Non-Farm Payrolls. Friday, 6th July, 8.30pm. I expect figures to come in above 85K (previous figure was 69K).
Long AUD/USD at 1.0203
Last week, AUD/USD hit a monthly high of 1.0268 because of the good news coming out from the EU Summit.
I expect the risk rally to continue for AUD/USD this week. On the H1 chart, a Fibonacci Retracement is drawn from the swing low of 0.9996 (28th June) to the swing high of 1.0268 (2nd July).
A key support level is identified at the round number of 1.0200. The 23.6 level retracement is seen at 1.0203.
We will buy on the dip and enter for long once prices drop and retrace back up from the 23.6 Fib level. A stop loss of 50 pips is set, which is below the previous low of 1.0254 achieved on 29th June.
We will have two targets on this trade, exiting the first position at 1.0253 and the final position at 1.0303.
Entry Price = 1.0203
Stop Loss = 1.0153
1st Profit = 1.0253
2nd Profit = 1.0303