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Euro heading for October low at $1.3146

Euro crashed through $1.3250 following the worst Italian T-bill auction since August 1997, while the EURUSD basis swap reached new highs reflecting mounting eurozone concerns.

Headlines • Dismal Italian bond auction: six-month T-Bill auction yield at 6.50%, almost double the 3.53% at the last auction. Two-year zero coupon yield, 7.84%.

• EURUSD 3-month basis swap widens to fresh, post Lehman high, through -150bps

• Moody’s downgrades Hungary to BA1 with negative outlook

• ECB’s Coene says ECB “likely to cut rates again” if current economic trends continue

• Dutch finance minister warns that EFSF leverage is threatened by deteriorating market conditions

• ECB’s Gonzalez-Paramo: Eurobonds not suitable in current environment; ECB cannot act as lender of last resort

• China Investment Corp’s Jesse Wang reiterates China does not stand ready as the saviour of the currency; CIC looking for investment opportunities based on risk/reward assessments.

• Japanese finance minister Azumi: “[Japan] will respond to speculative currency moves without hesitation”

Market reaction

 EURUSD (minute chart)


Liquidity was reported to be very light following the Thanksgiving holiday. Risk sentiment overnight in Asia was generally poor, with EURUSD falling to a seven-week low although finding support with large buying reported around $1.3315 level.

However, the euro’s support was short lived, as the risk-off move continued in London, seeing the euro crash through the critical $1.3300 barrier. With dealers reported to be very long gamma above these barriers, the euro’s move lower was accelerated as traders scrambled to cover themselves.

EURUSD’s decline initially hit resistance at $1.3260 where it found supportive buy orders, but a dismal Italian six-month T-bill auction, with average yield of 6.5%, up from 3.54%, knocked confidence again, sending EURUSD as low as $1.3227.

AUDUSD moved lower, as real money selling saw the pair fall as low as $0.9666. With risk sentiment still negative, the Aussie is likely to continue to struggle, although it leaves the pair subject to being oversold, providing buy signals for short-term traders. Traders say order books suggest buying interest to remain supportive around the $0.9650 mark.

USDJPY held firm above Y77.30, climbing as high as Y77.55 in Asia. Japanese debt fears reappeared on the radar, following the IMF and S&P warnings, which saw a fairly strong sell-off in JGBs and may have contributed to the move higher.

Traders at a tier 1 bank say they still prefer to sell USDJPY on upticks to the Y77.70 area.

Cable has been dragged down with lower risk sentiment trading in the low $1.54s, levels not seen since early October when the Bank of England restarted its quantitative easing programme. Traders say a break of $1.5420 would open the way for a move down to the $1.5270 trend lows from October 6, which was its weakest levels since July last year.

Basis cross-currency swap

Basis widened this morning out as far as -160bps at one time, has since come back in to around -150bps. Moving around on thin air though - liquidity is pretty much non existent in the wake of thanksgiving. As to where we go from here, who knows - rationally it shouldn't be at these levels, and there is always a chance that some form of central bank action is taken to alleviate dollar funding, but markets are so thin and at a time of year where people aren't willing to risk mark-to-market losses then it doesn't take much flow to move it either way.

 Source: FXPro

Euro punctured through $1.33 on the London open, triggering stop losses all the way down to $1.3250, where it found good bids. A top 5 bank reported that their skew soon moved from being mildly in favour of EURUSD buying, to selling as the Italian bond auction results hit the wires.

AUDUSD’s run lower hit a wall at $0.9660 after it ran into option-related buying and corporate bids surfacing at 0.9650 looking to take the pair back to 0.9700. “Selling the rallies towards $0.9800 remains the preferred strategy,” says one London-based trader at a top-tier bank.

Traders also report that certain names, who were on the successful end of the setting of the EURCHF floor by the SNB, have been buyers of EURCHF in recent days.

GBPUSD met profit take orders around $1.5420, while traders say barriers sub $1.5300 should provide some support as well as Asia buying on any GBP dips.

The commodity bloc continued to trade heavily, with USDCAD breaking its recent range and moving to a seven-week high at C$1.0510 after good size option barriers were flushed out.

An Asian account was noted on top in early Europe, but the weight of dollar buying triggered stops through C$1.0500-10.


EURUSD vols crept higher on light flows this morning, with predominantly buyers of volatility as spot heads for the October 4 low of $1.3145.

Traders say the front end of the curve looks rich, with one-month now trading at 15.5%, even when considering that this runs over the end-of-year holiday season.

Traders also report an offered tone to vols in the pre one-month part of the curve, due to a predominance of barrier options below $1.30, while beyond one-month there’s more demand, which is giving the vol market a bid tone. Market makers have sold puts with barriers below $1.30. These structures get them long gamma above the barrier, so it's a big source of gamma supply.

Other traders argue there is already a lot priced into vols, with one-year trading at 16.5%. This is in line with the view that the spot will continue to grind lower, rather than a sudden drop.

Indeed, some traders say they’ve been selling vol to the downside because they don’t believe option vols will rally as much with spot lower, as the market has priced in.


G10 positioning little changed. Core euro short remains in place while positioning in high-beta currencies AUD and NZD became shorter.

A preference for safe haven assets has become evident with dollar buying mirroring strong inflows ($669 million) into US Treasures.

In emerging markets, bond funds have witnessed net outflows after five consecutive weeks of net inflows. EM local currency bonds and assets saw net outflows of $207 million and $2.7 billion respectively, according to HSBC data.

Spot, 7.00am, New York


What to look for

UBS has reported several meetings with Swiss officials from the Swiss National Bank and the ministry of finance that confirm the bank’s conviction that the SNB will raise the EURCHF floor to 1.25 at the next meeting on December 15.

Deflation worries remain present and if next month’s CPI and PPI figures show price falls in key Swiss export areas, such as the pharmaceuticals industry, the SNB is viewed as very likely to raise the, so far largely untested, floor.

With EURCHF likely to come under renewed pressure as euro concerns steadily increase, buying EURCHF on dips towards CHF1.22 may look increasingly attractive. That said, traders say that holding a long position is proving difficult to hold, with the euro trading so heavily.

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