Risk FX Under Pressure in Early Europe

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Risk FX was lower in late Asian session trade today, as growing concerns over the Eurozone credit crisis and weaker economic data weighed on sentiment sending EUR/USD below the 1.2700 level while Aussie drifted towards 1.0400. In Australia the NAB Business confidence reading slipped to -1 from 0 the month prior as investment plans declined.to their level since 2009. The decline in confidence in clearly having an impact on aggregate demand as all three sectors of the economy, manufacturing, construction and broader services have all contracted this year.

Meanwhile in France the payroll employment numbers printed worse than expected at -0.3% versus -0.2% eyed. This was the worst reading in more than 18 months and the third month of contraction out of the past four. The news bodes badly for EZ second largest economy as it continues to teeter on the edge of recession.

However, perhaps the greatest stress to risk FX was coming from the credit markets where periphery yields were starting to tick up once again. Italian yields on the benchmark 10 year were at 5.04% while Spanish bond yields were at 5.96% – dangerously close to the psychologically important 6% barrier. If credit markets continue to sell off the downside pressure on the EUR/USD will increase with shorts eying the 1.2650 and perhaps even the 1.2600 handle as the day progresses. The policy paralysis amongst EZ leaders in combination with deteriorating economic data is clearly starting to weigh on the euro.

Boris Schlossberg
Managing Director

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