EURUSD Falls Back Below 1.26 as Spanish Yields Soar

Fundamental Headlines

- Dollar Shortage Seen in $2 Trillion Gap – Bloomberg

- Euro Chiefs Signal Greek Austerity Softening as Summit Looms – Bloomberg

- Egypt Islamists Claim Presidency as Army Tightens Grip – Reuters

- Greece’s Conservatives Start Coalition Talks – WSJ

- Spanish Yields Surge; Greek Relief Wanes – WSJ

Asian/European Session Summary

The Greek elections yielded the somewhat surprising result of a strong New Democracy victory, with the pro-bailout party garnering enough votes to be in the position to form a coalition government with the other major pro-bailout party, PASOK. Should this materialize, it will keep the anti-bailout party Syriza on the sidelines as the main opposition, but that is only likely to last for so long. Early reports indicate that PASOK will not form a coalition government without the inclusion of Syriza, whose leader Alexis Tsipras has already stated that his party will not be joining New Democracy in a “grand coalition” of sorts.

On a bit of speculation about how this Greek drama will unfold, as a politician, Mr. Tsipras is playing his cards well, as he appears to be in the game for the long haul. That’s to say that if Syriza were to have won yesterday, it would have only been by a razor-thin margin, one that would have likely deteriorated quickly should Greece have needed another bailout under his watch (they will in about a month’s time). On the other hand, with a strong showing, Syriza is now primed to garner majority support in a few months when Greeks return to the polls (assuming New Democracy and PASOK form a government), as the center coalition won’t do anything to materially change Greece’s projected path out of the Euro-zone.

As the Greek election results have been digested, it’s now clear that G20 leaders won’t unveil the nuclear option of flooding the markets with a few hundred billion dollars of liquidity to ensure price stability in the coming days. This was much of the reason markets rallied at the tail end of last week, and without the promise of more easing, much of the gusto behind the US Dollar’s decline has been quelled. This “snap back” to reality after the election has dragged the EURUSD from its highest level in three-weeks at 1.2747 to back under 1.2600 just ahead of the US cash equity open.

Primarily, with no easing on the way, investors have dumped Spanish debt en masse, with the 10-year note yield surging today to as high as 7.285%, after opening at 6.840%. These are the highest yields the Spanish 10-year note has seen since late-April 1997. On the shorter-end of the yield curve, the Spanish 2-year note yield climbed as high as 5.592%, its highest level since late-November 2011.

Taking a look at other European credit, Italian debt is under pressure as well, with 10-year notes yielding 6.057%, at the time this report was written, after rising to 6.173% earlier in the day. The 10-year note yield topped on June 14, when it hit 6.342%. On the shorter-end of the curve, Italian 2-year notes rose by 18.9-basis points to a 4.522% yield.

EURUSD 5-min Chart: June 18, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

The Australian and New Zealand Dollars lead on the day, appreciating against the US Dollar by 0.22 percent and 0.34 percent, respectively. The Canadian Dollar is the worst performer, losing 0.42 percent against the US Dollar. After appreciating by as much as 0.88 percent, the EURUSD was trading 0.31 percent lower, at the time this report was written. The USDJPY was slightly firmer, gaining 0.22 percent on Monday thus far.

24-Hour Price Action

Key Levels: 13:45 GMT

Thus far, on Monday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 10096.63 at the time this report was written, after opening at 10060.99 (the index closed at 10072.32 on Friday). The index has traded mostly higher, with the high at 10111.05 and the low at 10060.88.

--- Written by Christopher Vecchio, Currency Analyst

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