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Demand for Safety Continues Following Italian Bond Sale

Demand for Safety Continues Following Italian Bond Sale

2011-09-13 14:08:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Fundamental Headlines

Merkel Eschews ‘Uncontrolled Greek Insolvency’ – Bloomberg

Obama May Limit Tax Breaks on Muni Bonds – Bloomberg

Geithner Heads to Europe as Debt Fears Mount – Reuters

Italy Under Pressure as Debt Worries Grow – Reuters

Stock Futures Hover Around Break-Even – WSJ

European Session Summary

Although the major currencies were relatively unchanged across the board just ahead of the North American session open on Tuesday, the currency markets were turbulent throughout the overnight following a smattering of disappointing news out of Europe. In regards to the overall situation in Europe, revolving mainly around the Southern European economies, credit default swaps are now pricing in a 98 percent chance of a Greek default at some point over the next five years. In fact, because the perception of Greek finances is so dire, bond markets are pricing the 1-year Greek bond at a 135.768 percent yield, up more than 30 percent since last Monday.

Concerns are not limited to Greece, however. The Italian bond market has come under increased siege the past few weeks, and a critical bond auction earlier today did little to abate worries. Italy sold €3.9 billion of a near 5-year benchmark bond at an average yield of 5.6 percent on Tuesday, a higher premium than the 4.93 percent yield at a July 14 auction for bonds of similar maturities. A report yesterday suggested that in addition to the European Central Bank participating in the bond auction today, China would be as well, in order to help anchor market confidence in the periphery European country.

EUR/USD 1-minute Chart: September 13, 2011

Demand_for_Safety_Continues_Following_Italian_Bond_Sale_body_Picture_1.png, Demand for Safety Continues Following Italian Bond Sale

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The EUR/USD faced extremely choppy price action throughout the overnight, trading as low as 1.3557 just ahead of the European session open at approximately 08:00 GMT, while moving towards 1.3700 shortly after the North American session began. Rumors have been swirling since the overnight that German Chancellor Angela Merkel and French Prime Minister Nicolas Sarkozy would be meeting on Wednesday in order to come up with another plan to save Greece and contain the costly ramifications of a Greek default.

It’s clear that as the Greek situation worsens, Euro-zone member states participating in the bailout of Greece are demanding collateral in exchange for funds. Chancellor Merkel is well-aware of this fact, and said that she’s “very optimistic” that some agreement could be reached that would help Greece while satisfying demands by fiscally sound nations, such as Finland, for collateral.

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is lower, trading at 9721.45, at the time this report was written, after opening at 9756.45. The index has traded mostly to the downside, with the high at 9790.22 and the low at 9721.45.

24-Hour Price Action

Demand_for_Safety_Continues_Following_Italian_Bond_Sale_body_Picture_4.png, Demand for Safety Continues Following Italian Bond SaleDemand_for_Safety_Continues_Following_Italian_Bond_Sale_body_Picture_5.png, Demand for Safety Continues Following Italian Bond Sale

Key Levels: 13:15 GMT

Demand_for_Safety_Continues_Following_Italian_Bond_Sale_body_Picture_6.png, Demand for Safety Continues Following Italian Bond Sale

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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