Today is the release of the much-anticipated results of the European bank stress tests, which are due out at 12 EST. There has been much speculation surrounding the tests, which are intended to provide clarity and transparency into the health of the European banking system.
Much of the recent rhetoric leading up to the tests has been positive; however it will be interesting to see if the market agrees. There is still some risk surrounding the results, as potential red flags still exist. Potential red flags could be the believability of the tests if only a few banks fail, or the new knowledge that more banks may be in trouble if more than expected fail. Either way, the market appreciates transparency, so in the long run this should be a positive.
The Euro has made a nice run higher from its June lows, so a reversal or pullback would not be out of the question entirely.
In the UK, GDP figures came in much better than expected lending credence to the notion that the economy is improving and providing further ammo for a potential reversal of monetary policy. The Pound is higher across the board.
In Canada, CPI figures came in less than expected, which may foreshadow a pause in further rate hikes.
Yesterday, the market went gang-busters with stocks, commodities, and “risk currencies” posting excellent one-day gains.
In the forex market:
Aussie (AUD): The Aussie is higher on mild risk-taking as European debt concerns fade going into the bank stress tests.
Kiwi (NZD): The Kiwi is also higher on risk-appetite, but catching an additional bid from Loonie weakness.
Loonie (CAD): The Loonie is mostly lower as CPI data came in less than expected. Core CPI came in at 1.7% vs. an expectation of 1.9%, and the monthly figure came in at -.1% vs. the expectation of a gain of .1%. This lends evidence that inflation may not be a problem in Canada, which would give reason for a pause in rate hikes going forward.
Euro (EUR): The Euro is slightly lower going into the stress tests despite the fact that German business confidence figures came in higher than expected. The stress tests are due out after the European stock markets close, the intention being that European traders won’t sell-off the stocks of banks that may not pass the test.
Pound (GBP): The Pound is higher across the board this as UK GDP figures came in at 1.6% vs. an expectation of 1.1%, handily beating to the upside. This shows that the UK economy may be gaining traction and may be reason for the BOE to reverse monetary policy.
Dollar (USD): The Dollar is showing a bit of strength to start the day as money flows from the Euro to the Dollar. While this is not a full-on risk aversion play, there is some safe haven demand for the world’s reserve currency.
Yen (JPY): The Yen is lower across the board as demand for carry trades is still intact and also because the Nikkei followed the US stock markets higher, as it is apt to do. Also to consider is the notion that Japanese officials do not want a strong yen so the intervention speculation is heating up. Should the market react negatively to the Euro bank stress tests, then we could see a rush to un-wind carry trades which could provide further Yen strength.
So this is the moment we’ve all been waiting for. It may take a little time for the market to digest the results so there could be heightened volatility both before and after the release.
The key to the stress test is going to be whether or not the market believes the results if they are overly positive, or the market reacts unfavorably to overly-negative results.
At the end of the day, we know that there are potential land-mines out there. Now we will know the extent. While this provides clarity going forward, this may be a case of “be careful what you wish for”.
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