Headlines
– Spain forced to pay a 14-year high of 5.022% to borrow EUR3.16 billion at one-year bill auction
– Germany’s Zew economic sentiment index weaker than expected, dropping to -55.2 in November
– German and French GDP rebound in third quarter, up 0.5% and 0.4% respectively
– PIMCO’s El-Erian: ECB needs to step-up and buy bonds much more aggressively if it’s going to be an effective “circuit breaker”
– UK CPI drops to 5% in October, down from 5.2% in September and lower than expected
– SNB’s Jordan says SNB “ready to act”, CHF “remains a very strong currency”
– Japanese finance minister Azumi said BoJ would take “timely” steps to address yen strength
– RBA minutes show a “case for leaving rates unchanged”
– IMF warns the Chinese financial system faces “a steady build-up in vulnerabilities”
Market reaction
USD and JPY were in demand on Tuesday with markets remaining nervous as eurozone policymakers appear unwilling or unable to calm fears over the region’s debt crisis. This reflected the apparent reluctance of the European Central Bank to step up its intervention efforts in eurozone government bonds, leaving the market with perception that there is no buyer of last resort.
Italian bond yields rose back above the 7% level that sparked the resignation of Silvio Berlusconi last week, while Spanish government bond yields spiked higher as Madrid was dragged back into the epicentre of the eurozone debt as it was forced to accept a marked rise in borrowing costs at a bill auction. The spread of French and Belgian government bonds over German bunds also hit record highs.
This weighed on global stock markets, fuelling haven demand for the USD and JPY and putting renewed pressure on the EUR.
The EUR failed to find support from a rebound in French and German GDP as the more timely German Zew sentiment indicator pointed to an economic slowdown in the region.
Weaker than expected inflation data kept GBP under pressure against the dollar as the market awaited Wednesday’s inflation report from the Bank of England for clues over further UK quantitative easing.
Deteriorating sentiment also put pressure on commodity linked currencies, sending AUD, CAD and NZD lower. SEK and NOK also suffered against the USD.
Spot, 7.00 AM New York
EUR: Current: 1.3520 Open: 1.3590 Support: 1.3480 Resistance: 1.3810
GBP: Current: 1.5860 Open: 1.5900 Support: 1.5280 Resistance: 1.6020
EURGBP: Current: 0.8520 Open: 0.8560 Support: 0.8510 Resistance: 0.8620
CHF: Current: 0.9160 Open: 0.9125 Support: 0.8990 Resistance: 0.9150
EURCHF: Current: 1.2390 Open: 1.2395 Support: 1.2330 Resistance: 1.2470
JPY: Current: 76.98 Open: 77.00 Support: 76.80 Resistance: 77.65
EURJPY: Current: 104.07 Open: 104.70 Support: 103.90 Resistance: 106.70
AUD: Current: 1.0117 Open: 1.0185 Support: 1.0100 Resistance: 1.0230
NZD: Current: 0.7671 Open: 0.7745 Support: 0.7620 Resistance: 0.7820
CAD: Current: 1.0254 Open: 1.0190 Support: 1.0130 Resistance: 1.0280
Swaps
Intensification of financial stress evident in the interbank market, where the cost to swap EUR for USD for a 3-month loan rises to nearly 120bps, surpassing the recent September high.
Positioning
IMM data released overnight showed speculators on the CME cut short positions in EURUSD in the week to November 8. Despite the likelihood that some of those positions may have been reinstated given recent price action, there still looks to be scope for more EUR selling. A trader at a top 3 bank looks for 1.3480 level to be tested again given market positioning isn’t short a current levels.
Flows
EURUSD losses accelerated after Middle East and fund support gave way on break of 1.3570
Japanese funds liquidating Italian exposure helped to accelerate losses in EURJPY, but cross is finding support at lower levels according to one London bank
Large US bank sees large seller of Swiss Franc on London open, and also EURCHF buying by Swiss corporate
One UK bank bearish on SEK, sees increasing potential for Riksbank to cut rates as European recession prospects spread to rest of Europe
Same bank sees EURUSD as a slow grind lower, and favours structured option trades to optimise move into the year end.
What to look for
In the US, retail sales and the Empire manufacturing survey are set to highlight the contrasting momentum between the US and Europe. Expect unexceptional growth in the US, but nonetheless expansion. Neither is likely to further the case for QE3 from the Fed.
