FX Turns Risk Positive after Spanish Auction

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Market Drivers
Spanish auction shows strong bid/cover interest sparking rally in risk
EZ PMI at 35 month low but does not contract further
Chinese HSBC PMI does not rebound at 48.1 vs. 48.4
UK Retail Sales perk up
Nikkei up 0.82% Europe down by -0.68%
Oil at $80/bbl
Gold below $1600/oz

Asia/Europe Eco Data:
NZD GDP (QoQ) 1.1% vs. 0.4% 18:45
CHF Trade Balance 2.48B vs. 1.97B 2:00
CNY HSBC PMI Manufacturing 48.1 vs. 48.4
EUR German PMI Manufacturing 44.7 vs. 45.3 3:30
EUR German PMI Services 50.3 vs 51.6 3:30
EUR Eurozone PMI Manufacturing 44.8 vs. 44.9 4:00
EUR Eurozone PMI Services 46.8 vs. 46.5 4:00
GBP Retail Sales 4:30 1.4% vs. 1.15

North American Data on Tap:
USD Initial Jobless Claims 8:30
USD Continuing Claims 8:30
USD Philly Fed 10:00
USD Leading Indicators 10:00
USD Existing Home Sales 10:00
USD Housing Price Index 10:00
CAD Leading Indicators 8:30
CAD Retail Sales 8:30

Risk tone was mildly firmer in the FX market in the aftermath of the Spanish bond auction that saw strong bid to cover ratios but higher yields as well. Spain was able to auction off a series of intermediate maturity bonds with some bid to covers rising to as high as 4 while yields rose but not too dramatically easing credit tensions somewhat with the benchmark 10 year dropping by 9 basis points to trade down to 6.63%.

The market appears to be clearly betting that the EZ will stand firmly behind Spanish sovereign debt and today’ auction was the first sign of bargain hunting activity in the credit. Today however the market will also get a glimpse of the report on Spanish banks and if the announcement shows a much larger gaping hole in the equity of the sector, the enthusiasm will quickly disappear.

Meanwhile on the economic front the data was generally mixed with Chinese HSBC PMI showing no rebound demand, EZ PMI stabilizing at low levels and UK Retail Sales surprising to the upside. The Chinese PMI report showed the impact of the European slowdown on Chinese manufacturing production as the reading slipped to a seven month low of 48.1 versus 48.4. New export orders fell to their lowest level since early 2009 as demand dropped.

In Europe the PMI picture proved gloomy as well as the data hit a 35 month low but the gauges did not deteriorate materially with EZ Manufacturing printing at 44.8 versus 44.9 and Services rising slightly to 46.8 from 46.5. Both PMIs remain below the 50 boom/bust line but the market took solace in the fact that the rate of decline has stopped suggesting that activity may have stabilized.

In UK the pop in Retail sales to 1.4% form 1.1% eyed was a welcome relief especially after last month’s massive -2.3% decline. Overall, non-food sales volumes were up 1.3% between April and May, while sales at predominantly food stores rose just 0.2%. Cable rose through 1.5700 and could target 1.5750 as the day proceeds.

In North America today the focus turns to unemployment claims, Philly Fed, LEI and a new flash PMI Manufacturing indicator form Markit with market expectations for little change in most of the data. The tone therefore could be set by equities with markets still digesting Dr. Bernanke’s remarks from yesterday. Although the Fed did not suggest that it will move on QE just yet, Dr. Bernanke mention of the BoE credit easing programs suggest that the next round of extraordinary measures may involve a plan similar to one proposed by the BoE which could attempt to directly lower credit costs for millions of homeowner by making refinancing a lot easier. Such a move could prove simulative and or now risk sentiment remains constructive.

Boris Schlossberg
Managing Director

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