Market Drivers August 21, 2012
Euro clears 1.2400 on speculation that ECB will act on rates
Spanish T-Bill auction at 90 bp less than the period prior
Nikkei off -0.16% Europe up 0.59%
Oil at $96.63/bbl
Oil at $1627/oz.

Europe and Asia:
AUD RBA August Minutes
JPY All Industry Activity Index 0.2% vs. 0.3%
NZD Inflation Expectations 2.3% vs. 2.4%
NZD Credit Card Spending 0.1% vs. 3.9%
CHF Real Estate Index Family Homes n/a
GBP Public Sector Net Borrowing Pounds -1.8B vs. -2.7B

North America:

Euro blew through the 1.2400 figure in early European trade today on the back of comments by managing director at Fitch ratings who suggested that the ECB may embark on its rate capping plan irrespective of any objections by the Bundesbank. The rally took out an array of stops near the 1.2400 level squeezing the pair to a high of 1.2420 as the key resistance level gave way.

Risk appetite was also helped by the string results from the Spanish T-bill auction which saw the yields on the 18 month Treasuries drop by 90 basis points from the period prior. Overall Spain was able to auction off 4.515B of T- bills – a slightly higher than estimated range. Although funding rates remain uncomfortably high for Spain, the recent easing of tensions in the country’s credit markets has helped to lower the cost of debt service to more manageable level. However, the country continues to rely on shorter term maturities to support its financing.

So far speculation about ECB actions remains just that – speculation. Until EZ monetary officials confirm their policy direction, the EUR/USD remains vulnerable to whipsaw moves. For now the power clearly lies with the bulls and they will no doubt want to push the pair towards the key 1.2500 level to force more short covering as the credit concerns regarding EZ sovereign debt continue to abate. However, the markets will now expect some concrete statements from Angela Merkel and Francois Hollande when they meet this Thursday. If the meeting produces no substantive policy initiatives, than the euro could quickly sell off once again.

Elsewhere, the RBA minutes provided a hawkish tone, sending Aussie through the 1.0500 handle as monetary officials remained surprisingly upbeat about the economic prospects in the region suggesting that rates will not be lower any further for the foreseeable future. Our colleague Kathy Lien wrote, “The RBA is overlooking many of the problems that investors have been worried about which suggests that they do not believe Europe and China will pose a major threat to their local economy in the last 4 months of the year. For the time being, the central bank has become more tolerant of a higher exchange rate and is comfortably on hold. The RBA even admitted that part of the gains in AUD/USD can be attributed to reserve diversification by the Swiss National Bank. They said the SNB purchased EUR 100 billion worth of AUD over May and June with further large purchases occurring in July. “

In North America today the calendar is barren with only the Canadian wholesale sales on the docket. As has been typical of late, trading will likely be driven by rhetoric rather than capital flows as FX markets look for reasons to confirm or refute the optimism from the overnight trade. In order for euro to make further progress to the upside German policymakers have to show some acceptance of the ECB proposal to cap periphery rates. So far they have been reluctant to do so, but if the market begins to sense that Germany will not block any ECB action even if it doesn’t approve it then the euro could
push higher as credit concerns ease further.

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