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Foreign Exchange

Weak demand for French paper sends euro to new depths

Tepid demand at a French bond auction, combined with worries over contagion from a Hungarian default and speculation over the health of a German bank, sends the euro to a raft of fresh lows.

Headlines • France sells €4.02 billion in bonds due in 2021 at an average yield of 3.29% and a bid-to-cover ratio of 1.643, down from 3.05 at December auction

• Spain says it expects banks to set aside up to €50 billion in further provisions on their bad property assets – FT

• Hungary sells Ft35 billion in 12-month bills, less than Ft40 billion targeted, at yield of 9.96% versus 7.91% at previous sale

• German November retails sales unexpectedly drop 0.9%

• China’s 2011 trade surplus drops to 2% of GDP from 3.1% in 2010

• UK December services PMI beats forecasts, rising to 54.0, the highest since July, from November’s 52.1

Market reaction and flows

The euro fell broadly on Thursday as weak demand at a French bond auction added to worries over eurozone debt, sending it to a series of lows against a broad range of currencies.

The single currency was suffering ahead of the French sale, as Italian bond yields rose through 7% for the first time this year, worries heightened over the health of Spanish banks and speculation of a debt default in Hungary raised concerns over the possible spillover effects on the eurozone banking system.

Also weighing on sentiment were rumours that a large German bank might need to raise capital.

EURUSD traded down to a fresh 15-month low below $1.2850 as heavy selling from German and French names unlocked stops below $1.2900, $1.2880 and $1.2860. Traders said the move below $1.2850 flushed out a raft of barrier options.

Meanwhile, EURJPY dropped to a 10-year low and EURAUD hit a record trough.

EURGBP also fell to a 15-month low, with sterling buoyed by better-than-expected UK services data and by figures from the Bank of England, which showed international investors bought a record amount of gilts in October and November.

The euro did outperform the Hungarian forint, however, as Hungary sold less than targeted at a bill auction and amid continued worries that Budapest would fail to secure a bailout from the IMF. EURHUF rose to a fresh record high above Ft323.00.

Increased concerns over Europe helped the dollar to advance broadly, with GBPUSD falling below $1.55 and USDJPY edging up towards the Y77.00 level.

Commodity-linked currencies also gave back some of their gains. AUDUSD moved down to the $1.0250 level, having failed to breach its highs around $1.0400 earlier in the session, with traders reporting strong offers from Asian accounts defending option barriers around the figure.

Still, the AUD failed to mirror the sharp drop in the EUR, with traders speculating that reserve managers and exporter were underweight of the currency.


BNY Mellon iFlow data shows real-money investors have continued to pull funds out of the EUR during the past week, despite the rally in the single currency that heralded the start of the year.

USD was the main beneficiary, seeing strong inflows, while investors also put funds into NOK and SEK.

There was a turnaround in GBP, JPY and CAD, which all saw outflows, while investors also pulled money away from the CHF.


EURHUF vol curve continues to head higher. One-month implied trading at 18 on Thursday morning, one vol higher from yesterday, and four vols higher from the beginning of the week.

That is well above realised vols, but with spot hitting all-time highs, it may have further to go, say traders. Indeed, as things stand, EURHUF is the only vol curve in the market that is inverted (EURCZK inverted from three-month-one-year).

SG strategists believe that the florint should weaken further, and the vol configuration appeals for trading call spreads despite the current wide bid/offer costs.

EUR vols opened offered, but with the euro decline they are now heading slightly higher. Traders say bid to cover of the French bonds auction this morning was expected to be better, so it is reviving the fears about the EU debt burden.

1M vol trading at 13.0 now, from 12.7 yesterday. 1W vol is 1 vol higher.


What to look for

The CZK could find itself negatively affected by the turmoil in neighbouring Hungary.

“The CZK used to be considered a safe haven in central Europe, but that is no longer the case,” says Guillaume Salomon at Société Générale. “The CZK is vulnerable to contagion risk.”

Salomon says the open Czech economy cannot escape the rising negative sentiment towards central European assets or the ominous slowdown in global economic activity. Furthermore, he says, unlike other central banks in the region, the Czech National Bank is unlikely to step in and try to contain weakness in its currency.

SG recommends buying EURCZK with an entry level of Kc25.91 and target of Kc27.00 initially.

Spot 6.30 EST

EUR: Current: 1.2835 Open: 1.2940 Support: 1.2805 Resistance: 1.3080

GBP: Current: 1.5538 Open: 1.5616 Support: 1.5510 Resistance: 1.5670

EURGBP: Current: 0.8259 Open: 0.8210 Support: 0.8260 Resistance: 0.8330

CHF: Current: 0.9481 Open: 0.9420 Support: 0.9310 Resistance: 0.9510

EURCHF: Current: 1.2178 Open: 1.2190 Support: 1.2135 Resistance: 1.2260

JPY: Current: 76.78 Open: 76.70 Support: 76.30 Resistance: 77.20

EURJPY: Current: 98.57 Open: 99.30 Support: 98.30 Resistance: 100.20

AUD: Current: 1.0251 Open: 1.0365 Support: 1.0210 Resistance: 1.0415

NZD: Current: 0.7811 Open: 0.7875 Support: 0.7800 Resistance: 0.7925

CAD: Current: 1.0185 Open: 1.0125 Support: 1.0080 Resistance: 1.0210

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