Euro Drifts Towards 1.2200 as Spanish Yields Rise

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Market Driver July 20th, 2012
Friday summer slumber as FX treads water
German PPI contracts by -0.4% Spanish 10 year above 7%
Nikkei -1.43% Europe -0.06%
Oil at $91.60/bbl
Gold $1581/oz.

Europe and Asia:
NZD Credit Card Spending 4.6% vs. 3.9%
EUR German Producer Prices -0.4% vs. -0.2%
GBP Public Sector Net Borrowing 12.1B vs. 11.8B

North America:
CAD CPI 8:30
CAD Bank Canada CPI Core 8:30

It’s been an extremely quiet night in the currency market as Friday summer doldrums seems fully upon us, as but as dealing progressed in morning European trade risk FX began to drift lower as yields on the Spanish 10 year bonds rose above the psychologically key 7% level. Although both Finland and Germany ratified the bailout terms for Spanish banks, the market is viewing the move as too little too late. Meanwhile the latest polls out of Germany suggests that citizens of Eurozone’s largest economy are becoming weary of further bailout actions.

In an Infratest dimap poll commissioned by ARD public television, 52% of Germans are against Spain receiving aid from euro region financial backstops, while 38% approved planned rescue. The news bodes badly for Angela Merkel who must contend with waning support at home for any further action to stabilize the credit markets in the region.

Meanwhile on the economic front German Producer prices saw their sharpest contraction since January printing at -0.4% versus -0.2% eyed in sign that energy costs and lackluster demand are having a deflationary impact on PPI. Energy costs saw the largest decline dropping -1.4% on the month while basic goods fell by -0.3%.

Ex-energy German PPI declined by -0.1% on the month increasing only 1.0% on a year over year basis – well below the ECB 2% annual target rate. The lower PPI data suggests that CPI readings in Europe’s largest economy will likely decline as well, providing more latitude for ECB to ease, although the central bank has been reluctant to take aggressive steps on monetary policy despite clear signs of economic slowdown in the region.

The North American calendar is extremely light as well today with only Canadian CPI on the docket. Volume is likely to be extremely light with most traders minds focused on the beach rather than the FX screens and if equities decide to drift lower into the week-end the EURUSD will likely follow suit with shorts targeting the 1.2200 level as initial point of support. The euro remains extraordinarily weak on the crosses with EURJPY dropping to 96.00 while EURGBP has breached the .7800 level as investors continue to flee the currency amidst no signs of improvement in the EZ credit crisis

Boris Schlossberg
Managing Director

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