While most of the major currencies are unchanged against the
U.S. dollar this morning, it is worth noting that the EUR/USD broke
below 1.25 at the start of the North American trading session. The
lack of major U.S. and European economic data ahead of a long
holiday weekend should have meant more stability than volatility in
the financial markets. Unfortunately rumors, speculation and
ongoing concerns about Greece leaving the euro has left investors
nervous about buying and selling the single currency. With a small
but serious risk of European governments taking advantage of the
U.S.' long weekend to make a major announcement, we are also seeing
profit taking and short covering in euros which explains why the
currency pair snapped back so quickly when it broke below 1.25.
Spanish 10 year bond yields are also up 13bp this morning which
indicate that contagion remains a concern.
Risk appetite received a bit of a boost from the revisions to
the May University of Michigan Consumer Confidence index. According
to the survey, Americans were even more optimistic than initially
reported. The UMich index was revised up to 79.3 from 77.8 compared
to a reading of 76.4 in April. While the momentum in the U.S.
economy remains sluggish, confidence improved for the ninth
consecutive month. Interestingly enough, current conditions were
revised lower but the economic outlook was revised higher. Another
piece of positive data makes parking money in the dollar even more
attractive and means that the Fed won't need to introduce another
round of easing for the time being. Fed President Dudley, one of
the more dovish members of the FOMC will be speaking later this
afternoon and he is expected to repeat his view that a case could
be made for further easing but we believe the Fed won't be pulling
the trigger unless Europe's problems set off another 5 to 7 percent
slide in the Dow.