After starting on a sour mood, currency markets saw a tentative rebound into risk, with commodity currencies recouping most of their losses from the Sunday/Monday price action. However, the EUR continues to remain pressured as yields in Spain and Italy rose and there was continued pessimism surrounding the upcoming EU Summit.

Overnight Developments:

• Italy sells notes and Spain sells bills at higher interest rates, the country’s 10-year yields advance.
• Interestingly enough, Germany’s yields rise as well.
• Cyprus becomes the 5th country to request a bailout.
• Japan’s lower house passes bill to raise sales tax – a primary objective of Prime Minister Noda.

Italy and Spain Auctions:

• Italy sold 2.99 billion euros of zero-coupon notes due in May 2014 at a yield of 4.71 percent, more than the 4.04 percent paid on May 28.
• Spain sold three-month bills at an average 2.36 percent, compared with 0.85 percent at the last auction on May 22, and six-month bills at 3.4 percent, versus 1.74 percent last month.
• Moody’s downgraded 28 Spanish banks yesterday – citing the country’s sovereign debt and rising debt levels – though this move was anticipated.
• Auctions knock back any confidence in European equities, and undermine EUR, which was already softer heading into European session.

EU Summit Proposals:

• Market participants don’t expect much from EU Summit – EUR may be weak heading into it as a result.
• Draft proposals is being circulated that calls for the EU to gain far reaching powers to rewrite national budgets for countries that breach debt and deficit rules.
• EU would act as a region wide finance minister, with authority to fine countries that breach levels.
• This move towards “fiscal union” would be key to convincing Germany to move forward with some form of mutualizing of sovereign debt.

Cyprus Bailout:

• Needs bailout as its banks have huge exposure to Greek sovereign debt.
• In addition nonperforming-loan ratio for domestic loans also had risen substantially over the past year as the country’s economy contracted and unemployment rose.
• Fitch said that in addition to the 1.8 billion euros ($2.3 billion) required to recapitalize Cyprus Popular Bank, the country’s banks could require as much as an additional 4 billion euros in additional capital — an amount equal to 23% of the tiny country’s gross domestic product..

Japan Set to Raise Sales Tax:

• After months of wrangling, Japan’s lower house passes a bill to raise Japan’s 5% sales tax to 8% (in Apr 2014) and then to 10% (Oct 2015).
• 57 lawmakers from the majority voted against, may leave DPJ.
• But the overall vote was 363-96.
• It now goes to upper house where its passage is seen as likely.
• This is a positive step for the country’s finances – where debt to GDP is at 223%.

UK Public Borrowing Rises:

• Public sector net borrowing, excluding the effect of financial interventions, was £17.9bn in May, more than economists expected and more than the £15.2bn the government borrowed in the same month last year.
• Chris Williamson, an economist at Markit, said the figures “cast further doubt on the government’s ability to meet its deficit reduction targets in the current economic environment”.

HSBC Sees Global Trade Still Confident:

• Some 71 percent of exporters, importers and traders expect shipment volumes to be unchanged or increase in the next six months, HSBC said in a statement today. The bank cited a survey of 5,800 enterprises in 20 countries from April 10 to June 1.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com – provider of  News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.