Has Euro Stabilized at 1.2100?

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Market Drivers July 23, 2012
Spanish 10 year hits euro era highs
Spanish Economy Minister De Guidonos to meet with Schauble on Tuesday
Nikkei off -1.86% Europe off -1.96%
Oil at $88.79/bbl
Gold at $1571/oz.

Europe and Asia:
AUD PPI 0.5% vs. 0.35
EUR Eurozone Consumer Confidence n/a

North America:

Risk FX remained under pressure at the start of week’s currency trade with EUR/USD breaking below the 1.2100 level as yields on the Spanish 10 year bonds hit their euro ear high of 7.5%. Concerns over the periphery credit markets continued to dominate trade as Catalonia suggested that it may join Valencia is asking the Spanish government for more aid.

The fiscal problems of Spain’s autonomous regions have only served to exacerbate an already fragile situation in the EZ credit markets and the barrage of bad news kept the pressure on the euro sending the single currency to a fresh yearly low of 1.2082 in early European dealing before short covering finally pushed it back above 1.2100.

With no meaningful economic data on the docket and investor focus squarely on the credit markets, the onus remained on policy makers to come up with some response to pacify the markets. Tomorrow, the Spanish Economy Minister Spain’s Luis de Guindos will fly to Berlin for a meeting with German finance minister Wolfgang Schaeuble. In an interview in Monday’s edition of Germany’s Bild newspaper Schaeuble said he expected Spain’s economy would rebound stating that, “Spain’s economy is much more powerful and has a different structure — the country will be back on track soon.”

Yet time is one luxury that EZ policymakers do not have. At yields now hitting well above the key 7% level, Spain faces the imminent danger of being priced out of the capital markets. The Spanish sovereign does not need to tap the credit markets in August, but it clear that the current credit situation is un unsustainable and policymakers will need to act fast in order to avoid a full scale crisis. Meanwhile the silence form the ECB has been deafening as the central bank has refused to step into the secondary market to support Spanish bonds contributing to the turmoil in the credit markets.

With so much negative sentiment centered on the euro the common perception is that the pair is headed straight for a test of the 1.2000 level, but positioning so widely skewed, the unit may see some short covering on the slightest positive news out of Europe. Note that while the single currency remains weak, it has stabilized on the crosses in overnight trade suggesting that for now at least the selling may pause.

With no eco data in North American trade today credit and equity markets will continue to drive FX. For the time being the EUR/USD appears to have stabilized at the 1.2100 level but action remains volatile and any headline news could quickly move it in either direction as markets continue to be skittish amidst heightened risk aversion sentiment.

Boris Schlossberg
Managing Director

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