FOREX: Euro Gains May Prove Short-Lived as Traders Eye Portugal Debt Sale

Key Overnight Developments

• Aussie Dollar Extends Drop on Fears Floods Will Undermine Growth
• Japan’s Current Account Surplus Narrows to Smallest in Ten Months

Critical Levels

The Euro and the British Pound advanced in overnight trade, adding 0.3 percent each against the US Dollar as the greenback continued to correct lower for a third day after putting in the biggest 5-day rally in over four months last week. We remain short EURUSD.

Asia Session Highlights

The Australian Dollar continued to slide in overnight trade, falling as much as 0.6 percent on average against its top counterparts, amid continuing fears that the worst floods since 1893 will undermine overall economic growth. Reserve Bank of Australia director Warwick McKibbin said repairing the damage from the floods could cost as much as 1 percent of overall GDP. An unexpected jump in Home Loans, which rose 2.5 percent in November while their value swelled 2.9 percent, failed to offset selling pressure.

Japan’s Current Account surplus narrowed more than expected to 926.2 billion yen – the smallest in 10 months – as a gain in imports outpaced that of exports. Inbound shipments rose 15.7 percent from a year ago while overseas sales rose just 9.3 percent, a hair above the 11-month low at 8.8 percent recorded in the previous month. While it seems tempting to attribute the outcome to the stronger Japanese Yen, it is worth noting that import growth has been trending lower having peaked in May 2010, with today’s outcome firmly in line with that trajectory.

Euro Session: What to Expect

Traders are likely to look past a lackluster economic calendar with the focus squarely on the evolution of the Euro Zone debt crisis as Portugal taps the markets to auction off 3-year and 10-year bonds. The markets seem cautiously optimistic: the spread between Portuguese and benchmark German bond yields has narrowed a bit from yesterday and credit-default swap spreads are slightly lower.

Still, the yields on offer – 3.6 and 4.8 percent for the shorter- and longer-term securities, respectively – are well below market rates. Indeed, Portuguese 10-year yields are trading at 6.7 percent. This suggests the possibility of poor uptake is a very real one, with such an outcome threatening make Portugal the next country seek assistance through the European Financial Stability Facility (EFSF) and weighing on the Euro.

Scanning the data docket, UK Visible Trade Balance figures are set to show the deficit narrowed to -8350 million pounds in November while Euro Zone Industrial Production slowed, with output adding 0.5 percent from the previous month.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com