Market Drivers for Feb. 27, 2013
Italian BTP auction goes off better than expected helping lift EURUSD
Aussie drops below 1.0200 – lowest level of this year
Nikkei -1.27% Europe -0.9%
Oil $92.92/bbl
Gold $1609/oz.

Europe and Asia:
JPY Retail Trade -1.1% vs. -1.4%
CHF UBS Consumption Indicator 1.18 vs. 1.32
CHF KOF Swiss Leading Indicator 1.03 vs. 1.00
EUR German Gfk Consumer Confidence Survey 5.9 vs. 5.9
EUR Euro-zone Consumer Confidence -0.73 vs. -1.02
GBP GDP -0.3% vs. -0.3%
GBP Total Business Investment -1.2% vs. 0.5%

North America:
USD Durable Goods Orders 8:30
USD Durable Ex Transportation 8:30
USD Pending Home Sales 10:00

Better than expected results from the Italian bond auction and an improvement in EZ consumer confidence readings helped lift the EUR/USD in morning European trade today, but the rally was capped the the 1.3125 level as profit taking from Asian traders contained the rally for now.

Italy was able to auction off 5 and 10 year bonds achieving maximum allotment as the auction was heavily oversubscribed. The yield on the 10 year BTP increased to 4.83% from 4.17% the period prior but this was lower than the 4.90% yield in the cash market prior and indicated that the market was willing to assume Italian credit risk despite the political uncertainty surrounding the election results.

Although no effort has yet been made by Mr.Bersani to form a coalition, a spokesman for the upstart candidate Beppe Grillo stated that he way weigh support for the Bersani government. The conventional wisdom was that Mr. Bersani and Mr. Berlusconi could form a “national government of unity” which could provide a stable majority in the Italian parliament and create some legislative possibilities. However, its clear that Mr. Grillo is now afraid that his protest candidacy efforts will be marginalized unless he makes concerted efforts at compromise, so today’s change of tone reflects a more pragmatic stance from all the parties.

Although the cost of financing for Italy has risen, it has not reached anywhere near the crisis levels of 2011 and 2012. With yields on the 10 year BTP below the key 5% mark, the credit markets are signalling two messages. One, despite the turmoil of unresolved elections, Italy is likely to muddle through with some form of coalition government. Two, in a ZIRP world starved for yield, any premium is quickly grabbed by eager investors.

The euro spiked to 1.3122 in the immediate aftermath of the auction, but quickly retreated after sellers from Asia swamped the market with offers. For now it is consolidating underneath the 1.3100 level and of the political news out of Italy continues to be promising, the pair could make another run at the 1.3125 highs as the day proceeds.

Meanwhile in Australia the dollar fell to a three month low, breaking the 1.0200 barrier for the first time this year as sentiment towards the commodity currency continued to sour on fears that the economy Down Under is beginning to slow materially. Earlier report on Construction Work Done showed a surprising contraction of -0.1% versus 1.5% eyed. This was the first decline in the sector in more than a year.

The drop in construction was the result of decline in engineering work involving mines, bridges and roads. Residential construction continued to expand at 1.7% rate. The sharp drop in engineering construction is precisely the reason investors are becoming concerned about the Australian economy.

As the mining boom fueled by demand from China comes to an end, the Australian economy must find alternative path to growth. As we’ve noted many times before, growth could become increasingly difficult given the country’s elevated exchange rate and negative terms of trade. Last night an S&P report on the country noted that while its AAA rating remained secure for now, Australia faced the prospect of a downgrade if demand from China slowed materially or if the country’s housing sector saw a sharp fall in prices.

The Aussie remained under pressure through most of Asian session trade and finally cracked below the 1.0200 level as European dealing came on line. The pair has some support at the 1.0150 level but reported selling by real money accounts and speculative shorts could continue to weigh on the unit. A break below the 1.0150 level could trigger further panic amongst investors and open the path towards possible test of parity.

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