• 7 banks fail stress test, 5 Spanish Cajas, ATE in Greece, Hypo RE in Germany
  • Total capital shortfall an insignificant EUR 3.5 bln
  • Regulators call test tougher than US version in 2009; analysts skeptical
  • Canadian inflation slips to 1.0% annual rate in June, easing pressure on BOC to hike
  • White House’s US budget deficit forecast narrows slightly
  • GE raises dividend 20%; helps spark equity rally
  • US equities rise 0.75%, closes above 1100
  • US 10-year note yield rises to 2.99% , up nearly 15 bp on the week

I’ve sat here for the last nine hours and I feel as if I know less than I did when I started. The stress tests turned out to be a low-stress affair as many anticipated with a shockingly low only EUR 3.5 bln in capital required to be raised the entire European banking system. Skepticism abounds but the EUR selloff was short lived.

We dipped as low as 1.2807 after the results from 1.2850ish before but end the day at 1.2915 via 1.2930 afternoon highs, underpinned in part by a strong rally on Wall Street.The lows for the day were set in advance of the release of the tests. We fell to 1.2795 as the criteria for the tests were released. Traders were dismayed that debt held outside of bank trading books was not subject to haircuts.

Markets may be less reluctant to take a run at EUR/USD next week, without a weekend to contend with…

AUD/USD was an impressive performer during the US session, rising to retest highs in the low 0.8970s. We are flirting with a close above the 200-day moving average at 0.8966. Barriers at 0.9000 could come into play early next week.

USD/JPY was at its strongest in early US trade, rallying to 87.51 before being capped by exporters and options-related offers. 87.20/50 contained most of the price action. firmer US yields and a growing short position in the Chicago option pits are supportive factors (along with growing risk appetites) headed into the new week.

USD/CAD rallied on weak Canadian GDP as well as early and on disappointingly weak criteria for the stress tests. It gapped up to 1.0435 but monthly demand for CAD for energy settlements capped the advance. We end the day at 1.0365.

The uptick in risk appetite late in the week was a boost for JPY crosses. EUR/JPY ends at 113.00, the upper reaches of a band of congestion on the charts. A break of the 113.40/50 area should brighten the technical backdrop.