In the hours before their release, the expectations surrounding the release of the EU bank stress are fast deflating as they are deemed not stressful enough. EURUSD is at a critical inflection point after a roller coaster week. The stress test results today from the EU were meant to show a new spirit of transparency and reality, but even before their release, all signs point to another farce in the making, as reports have emerged that a likely Greek default is not calculated in the result and a large German bank refused to participate in the process. Regardless, the number of banks expected to failed the stress tests comes in anywhere from 10 to 25, just to provide a range for the expectations as the official results are made available at 1600 GMT today. But if the tests don’t contain the possibility of a significant markdown of sovereign debt portfolios, they will hardly be considered credible, though if details emerge that allow the market to make its own calculations, they could nonetheless be of considerable interest. Chart: EURUSD EURUSD ahead of the stress tests is a study in indecision. After breaking firmly lower through the rising line of consolidation, the pair rallied back to retest that area after Bernanke hinted that the Fed stood at the ready if conditions should warrant (though he yesterday made it clear, to risk appetite’s chagrin, that the Fed was not ready to do anything at this time and had no specific plans). Today we have the stress test results that are likely to swing the pendulum one way or another. The pressure remains to the downside in EURUSD unless the stress tests results can somehow generate real movement in Euro spreads and/or a fresh rally in risk appetite. If we close above 1.4200/50 in the day or two ahead, this would tactically neutralize the downside potential. But barring that development, the focus lower remains the 200-day moving average (just above 1.3900). A close below there could setup a further leg down toward the big 1.3450 area for starters. 
Chart: AUDCAD AUDCAD swooned overnight on a weak Aussie (weak on no apparent catalyst other than the glaring mismatch of recent market action versus interest rate spreads and falling risk appetite late yesterday moving to AUD’s detriment.) The pair appeared to breaking lower earlier this week, but then the rally off the Bernanke comments on the possibility of more stimulus nullified the break. Now the downside pressure is very much on again and we’re once again challenging the interesting neckline-like area of the longer term and rather messy head and shoulders setup. 
US Data The US June CPI mimicked the PPI data from yesterday, with the headline coming in slightly under expectations due to the fall in energy prices, while the core continued to rise. The core CPI, at +1.6% YoY is the highest since the beginning of last year. The Empire Manufacturing survey was very weak, registering the second negative number in two years. The ugliest spots in that survey include New Orders falling to -5.45 and the average workweek dropping to -15.6, suggesting less pressure on employment capacity. Looking ahead The EU stress test results are due at 1600 GMT. Up shortly we also have the University of Michigan preliminary confidence reading for July (a survey that hasn’t done much in the big picture since 2009…) Today also sees the lower house of the Italian parliament voting on the Berlusconi government’s austerity package after it cleared the upper house recently. It is expected to pass, but that passage is doing little for the cause of tightening European sovereign spreads, which are actually slightly wider today. While the package provides measures for balancing the overall Italian budget by 2014, it has been criticized for focusing on cutting the most in 2013 to 2014, conveniently after the next election cycle. Let’s see how we close this topsy turvy week – nerves must be frayed on balance after the heady action this week as both sides of the market have a case of whiplash. Next week features the Bank of Canada rate decision, Bank of England minutes (interesting for news on the potential for QE renewal), preliminary EU manufacturing and services PMI and the German IFO late in the week. The US calendar is relatively quiet save for US housing market data (give the US at least two more years before we can expect any sustainable improvement there – the inventory overhang and slow withdrawal of the old GSE system and the government’s involvement in the market will make this a slow process.) and the Philly Fed later in the week. Most of all, stay careful out there and have a wonderful weekend. Economic Data Highlights
- Sweden Jun. Average House Prices out at 2.086M vs. 2.005M in May
- Norway Jun. Trade Balance out at 24.7B vs. 24.2B in May
- EuroZone May Trade Balance out at -0.6B vs. -3.2B expected and -2.5B in Apr.
- Canada May Manufacturing Sales out at -0.8% MoM vs. -0.2% expected
- US Jun. Consumer Price Index out at -0.2% MoM and +3.6% vs. -0.1%/+3.6% expected, respectively and vs. +3.6% YoY in May
- US Jun. CPI ex Food and Energy out at +0.3% MoM and +1.6% YoY vs. +0.2%/+1.6% expected, respectively and vs. +1.5% YoY in May
- US Jul. Empire Manufacturing out at -3.76 vs. +5.0 expected and vs. -7.79 in Jun.
Upcoming Economic Calendar Highlights (all times GMT)
- US Jun. Industrial Production (1415)
- US Jun. Capacity Utilization (1415)
- US Jul. Preliminary University of Michigan Confidence (1355)
- New Zealand Jun. Performance of Services Index (Sun 2230)
- New Zealand Q2 Consumer Prices (Sun 2245)
- UK Jul. Rightmove House Prices (Sun 2301)
- Australia Jun. New Motor Vehicle Sales (Mon 0130)
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