Risk FX Mildly Bid As Sentiment Improves

Posted on

Market Drivers October 16, 2012
Euro takes out 1.3000 on Spain hopes
EZ ZEW better on headline as sentiment improves
Nikkei up 1.44% Europe 0.88%
Oil $91.75/bbl
Gold $1742/oz.

Europe and Asia:
AUD Monetary Policy minutes
EUR German German ZEW -11.5 vs. 14.6
EUR Eurozone CPI 2.6% vs, 2.7%
GBP UK CPI 2.2% vs. 2.2%
GBP UK PPI -0.2% vs. 0.0%

North America:
USD CPI 8:30
USD Capacity Utilization 9:15
USD Industrial Production 9:15
USD NAHB Housing 10:00

The EURUSD rose through the key 1.3000 mark in early European trade today boosted by better risk sentiment flows in the equity markets and reports in the press that Spain was close to formally asking for a bailout from EU – an action that would allow the ECB to step into the bond market and buy Spanish sovereign debt. The pair however was unable to hold that price level as the day continued despite a better than expected reading in the ZEW investor survey.

Overnight reports in the FT suggested that Spanish fiscal officials are now ready to request a credit line from the ESM thus allowing the ECB to trigger its OMT program. Spanish officials insist however that they will not need to tap the facility as the country is able to manage its financing through the public markets and the move would only be a formality in order to comply with the terms of the OMT structure.

This sort of request would be “completely different” to the programmes imposed on Greece, Ireland and Portugal as it would not involve removing Spain from the financial markets.
Spain would not, however, seek to set any public limit on the maximum yield for its ten-year bond, or attempt to make such a request to the European Central Bank, according to Spanish authorities. “You must not show your room for maneuver to the market as the market will test it,” the official said.

Initially euro responded positively to the news but ran into a wall of profit taking above the 1.3000 mark backing off into 1.2980 by midmorning European trade. The ZEW survey of investor sentiment printed better than forecast at -11.5 versus -14.6 eyed as investor worries over the EZ sovereign debt crisis eased in the wake policy actions by the ECB. Still almost half of the respondents forecast that the economy will remain the same over the next six months seeing little growth ahead. ZEW institute’s Herr Dick noted that the announcement of the OMT program has not had any meaningful impact on sentiment.

Still, risk appetite has clearly improved as evidenced by today’s Spanish T-bill auction of 4.86 Billion euros which was above target with yields lower than in September. The euro therefore remains well supported and could make another run at the 1.3000 level and perhaps even challenge the minor swing highs near 1.3050 as the day develops.

In North America today the market will get a glimpse at CPI, TICS and Industrial Production data as well as the latest HAHB survey. The roster of reports is decidedly second tier, but of the data proves positive it should add to the better risk flows in the market and could lift USDJPY through the key 79.00 handle as the session progresses.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *