Euro Retakes 1.2550 as Periphery Yields Decline

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Market Movers August 28th, 2012
Better Spanish, Italian auctions prop up euro as 1.2550 taken out
Japan downgrades economic assessment for first time in 10 months
Nikkei -0.57% Europe -0.41%
Oil at $96/bbl
Gold $1667/oz.

Europe and Asia:
AUD HIA New Home Sales -5.6% vs. 2.8%
CHF UBS Consumption Indicator 1.55 vs. 1.59
EUR German GfK Consumer Confidence 5.9 vs. 5.8

North America:
USD Consumer Confidence 10:00

After a quiet, lackluster session in Asia, EURUSD roared higher in morning European trade boosted by strong Spanish and Italian Treasury auctions and comments from Fitch ratings agency that US may see another sovereign debt downgrade in 2013. In a sign that stress in the periphery sovereign debt market is beginning to ease, Spain was able to auction off 3month Treasury bills at a yield of less than 1% while the 6 month T-bills went off at 2.100% nearly 180 basis points lower than the auction last month. In Italy the 2014 notes went off at 3.064% versus 4.860% the period prior.

While yields in Spain and Italy remain high relative to the negative financing costs of their northern neighbors, the marked decline in rates is clearly a relief and a substantial reduction in debt service liabilities for the troubled Club Med economies. The auctions demonstrate that the concerted efforts of ECB officials to jawbone the market are starting to work as pressure on bonds begins to ease.

The ECB also announced today that Mario Draghi will not attend the Jackson Hole summit due to busy working schedule, suggesting that ECB may be putting finishing touches on a broad bond buying program to ensure that periphery yields remain manageable for the foreseeable future in order to allow the Southern European economies to begin to recover. Indeed, the Spanish Deputy Finance Minister stated today that he sees economic recovery in Spain starting early in 2013.

Elsewhere in Asia the news was not nearly as sanguine with Japanese government lowering their assessment of economic conditions for the country for the first time in 10 months. The report stated that “The movement toward an economic recovery will be affected by the decelerating overseas economies for the time being but is expected to continue due to reconstruction demand to some extent.” Japan’s export demand has fallen markedly over the past several months due to slowdown in China and the EZ hurting the country’s prospects for growth.

The downgrade in assessment sent USD/JPY to 78.50 from 78.75 at the start of Asian trade and sent yen crosses tumbling as risk aversion kicked in. Sentiment was also affected by -5.6% drop in Australian New Homes sales which highlighted the difficulties of the country’s housing sector which was a major driver of growth over the past several years.

In North America today the calendar carries only Consumer Confidence data with the market looking for an essentially flat reading of 65.8 from the month prior. Trading is likely to be subdued as many of the participants remain on vacation, but the more positive tone from Europe may prove supportive for risk appetite with longs looking to lift the EUR/USD through the key 1.2600 barrier which has been a source of stiff resistance for the past week. A break above 1.2600 could trigger further short covering as sentiment on the viability of the euro turns decidedly more constructive.

Boris Schlossberg
Managing Director

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