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Foreign Exchange

Vultures continue to circle the euro

The euro came under selling pressure in London as eurozone debt worries persisted, but sellers of the single currency were frustrated as it failed to break significantly lower.

Headlines • Spain sells less than maximum target at 10-year bond auction, paying sharply higher price than at October sale

• French refinancing costs rise in bond auction as demand drops.

• Moody’s downgrades 12 German Landesbanks saying “there is now a lower likelihood that these banks would receive external support if required”

• Fitch warns that eurozone contagion could threaten ratings of US banks

• UK retail sales come in higher than expected in October

• Irish finance ministry said it was involved in contingency planning to prepare for any potential eurozone breakup

• New Italian PM, Mario Monti unveiled his technocratic cabinet, and will act as economy minister. Government program to be outlined in today’s senate meeting.

• Greek PM Papademos won a vote of confidence for his government

Market reaction

Concerns that the eurozone debt crisis in the periphery is working its way to the core, with the potential to be exported globally, have not gone away. News of the German bank downgrades sent EURUSD below 1.3450 in Asia and the euro remained under pressure when London opened trading in a 1.3460 – 1.35 range in anticipation of Spanish and French bond auctions.

News of higher borrowing costs and reduced demand for Spanish and French paper saw EURUSD make a fresh attempt to break through its lows, though sellers were frustrated, with persistent talk of demand from Asian central banks resurfacing.

Technical analyst said the bounce from the 1.3430 – the third time in three days EURUSD has failed to break lower through that level – was not such a surprise, with a move through such a significant support likely to take time as traders positioned short of the single currency took profits on any dip.

The dollar strengthened across most risk proxies, AUD, CAD and NZD. AUDUSD continues its trend lower guided by heavy sentiment and the recent rate cuts trading in a 1.0050 – 80 range overnight.

As oil continues upward trend, rough correlations with WTI, now at $103, suggest USDCAD should be trading closer to 0.9700 but move lower hampered by dollar demand as risk sentiment remains weak.

GBPUSD remained under pressure around the 1.5740 mark as the Bank of England’s inflation report yesterday confirmed a bleak economic outlook for the UK. Traders say cable’s direction will continue to be driven by short-term risk-on/risk-off moves.

EURGBP remains firm as sterling holds on to last month’s solid appreciation against the euro despite BoE’s dovish inflation report opening the possibility for further QE. See Wednesday’s story on prospects for Sterling. EURGBP relatively steady overnight, trading in a range of 0.8530 – 0.8570.

USDJPY appears largely sidelined with very little yen-specific headlines coming out of the BoJ meeting. USDJPY continues to trade with little volatility in the 76.90 to 77.05 range.

EURCHF was trading above 1.2400 in London, with speculation of further intervention from the Swiss National Bank weighing on the Swissie.

Spot, 6.00 AM New York

EUR: Current: 1.3474 Open: 1.3500 Support: 1.3420 Resistance: 1.3590

GBP: Current: 1.5752 Open: 1.5740 Support: 1.5650 Resistance: 1.5910

EURGBP: Current: 0.8550 Open: 0.8570 Support: 0.8510 Resistance: 0.8620

CHF: Current: 0.9203 Open: 0.9190 Support: 0.9080 Resistance: 0.9275

EURCHF: Current: 1.2405 Open: 1.2410 Support: 1.2330 Resistance: 1.2470

JPY: Current: 76.94 Open: 76.97 Support: 76.95 Resistance: 77.40

EURJPY: Current: 103.70 Open: 103.85 Support: 103.30 Resistance: 105.00

AUD: Current: 1.0059 Open: 1.0100 Support: 1.0022 Resistance: 1.0200

NZD: Current: 0.7632 Open: 0.7660 Support: 0.7620 Resistance: 0.7750

CAD: Current: 1.0249 Open: 1.0215 Support: 1.0170 Resistance: 1.0280

EURSEK: Current: 9.1615 Open: 9.15 Support: 9.09 Resistance: 9.22

EURNOK: Current: 7.8059 Open: 7.7950 Support: 7.70 Resistance: 7.8450

Positioning

Deutsche Bank positioning figures showed short euro positions trimmed back from the near two-year highs seen earlier in the week.

Sterling remains net short but this net short positions were actually reduced somewhat, in line with fairly meagre market reaction despite weaker UK labour market data and dovish monetary policy outlook on Wednesday.

Swiss franc short positions unchanged although relatively sizeable still.

The Australian was the one G10 currency where there was a bit of a change, with the data showing the largest short position seen in 12 months at DB.

Flows

EURUSD. Tier one bank seeing no real selling after the Spanish bond auction, with a lack of confidence to take the EUR lower after third attempt in three days to push through $1.3450. The bank says the skew of buyers and sellers relatively even, but expects market to have another attempt at the level in due course.

Same bank saw large interest from Japanese retail accounts to sell EUR during London morning.

EURCHF , GBPCHF bid on rumours of the SNB checking prices in the forwards market, sparking fears that the central bank was set to intervene to weaken its currency

USDJPY. Traders say order book shows bids on the downside in the Y75 region –the implicit intervention floor –and light offers around the recent highs in the upper Y77 area.

AUDUSD. Another tier one bank saw large selling of AUD. A trader at the bank said selling seemed to be isolated to the Aussie, rather than a move related to selling of risk proxies, probably as the possibility for further rate cuts is taking away some AUD support.

Options

With the downside momentum on the EURUSD slowing, long gamma positions are being tested today.

One month risk reversals traded softer in Europe down to 3.6 from 3.9 on Wednesday, with some traders reporting aggressive selling at the shorter end of the curve.

Being long the EURUSD risk reversal is strongly negative theta, and has to be valued at a very high implied vol (realised volatility has been falling), so the time value decreases quickly. As a result, says one options trader, gamma scalping is tough, and some bearish players have had to abandon their positions.

Swaps

Funding strains evident as the 3m EURUSD cross currency swap at -127.5bp- the widest levels seen this year. Traders say the trend of lower STIR futures is continuing with ED's, Euribors and Short Stg all under pressure as markets still focussed on higher funding rates.

Another trader comments what is notable is that so far this has not had a dramatic effect on the currency. “But is likely to be behind some of the recent weakening of the euro,” he adds.

What to look for

US initial claims are expected to rise 5K to 395K below their 404K October average. The November Philly Fed is expected at 9.0 up from 8.7 in Oct. US Housing starts are expected to fall back in October after the spike higher in September.

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