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FOREX: Euro Looks to Italy Debt Sale for Direction, Pound May Rise

FOREX: Euro Looks to Italy Debt Sale for Direction, Pound May Rise

2011-09-13 06:53:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • Euro Outlook Rests on Italy Bond Sale Outcome, China May Step In
  • UK Inflation to Hit Highest Since May, Sinking Hopes for More QE

All eyes turn to Italy in European trading hours as the Euro Zone’s third-largest economy taps the markets to auction off a tranche of bonds spread across 2016, 2018 and 2020 maturities. Yesterday’s 91- and 365-day bill sale drew weak demand and the spread between Italian and German 10-year yields, an indicator of the additional premium demanded by markets to be compensated risk of lending to the Mediterranean country versus the region’s top economy, shot to a record high. The bid-to-cover ratio (an indication of an auction’s success) for Italian 4-10 year bond sales has averaged at 1.50 so this year, with anything lower at today’s offering likely to weigh anew on the Euro.

Importantly, there seems to be the distinct possibility of a surprisingly strong outcome after an Italian official cited by Bloomberg news revealed yesterday that the government had been in negotiations with China and its sovereign wealth fund, the China Investment Corp (CIC), about potential investments in the debt-strapped country. While the official allegedly said bonds were not the focus of the conversion, the possibility that the East Asian giant would step in as it had previously done with Spain, Greece and Portugal. Speculation of such an outcome got a boost today after Chinese Foreign Ministry Spokeswoman Jiang Yu said Europe is one of Beijing’s main investment destinations.

Elsewhere on the docket, the UK Consumer Price Index reading is expected to put the annual inflation at 4.5 percent in August, marking an increase from the previous month and the highest result since May. The outcome may prove to weigh against building expectations of an additional round of quantitative easing from the Bank of England and thereby bolster the British Pound. Indeed, the UK unit may see outsized gains if the outcome prints against a backdrop of rising Euro Zone sovereign debt fears, with traders flocking to the currency as an alternative regional safe haven as the markets remain wary of testing the resolve of the Swiss National Bank to defend its EURCHF floor at 1.20 ahead of this week’s rate decision.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

22:45

NZD

Manufacturing Activity (2Q)

2.1%

-

2.7% (R-)

22:45

NZD

Manufacturing Activity Volume sa (QoQ) (2Q)

-0.7%

1.0%

1.4% (R-)

22:45

NZD

Food Prices (MoM) (AUG)

-1.3%

-

2.0%

23:01

AUD

Australia Manpower Survey (4Q)

16%

-

17%

23:01

NZD

New Zealand Manpower Survey (4Q)

23%

17%

23:01

GBP

RICS House Price Balance (AUG)

-23%

-23%

-22%

0:00

NZD

REINZ Housing Price Index (AUG)

3223.7

-

3208.7

0:00

NZD

REINZ Housing Price Index (MoM) (AUG)

0.5%

-

-0.6%

0:00

NZD

REINZ House Sales (YoY) (AUG)

21.1%

-

11.7%

0:00

NZD

QV House Prices (YoY) (AUG)

0.1%

-

-0.4%

1:00

JPY

Japan Manpower Survey (4Q)

10%

-

8%

1:30

AUD

NAB Business Confidence (AUG)

-8

-

2

1:30

AUD

NAB Business Conditions (AUG)

-3

-

-1

5:01

CNY

China Manpower Survey (4Q)

25%

-

19%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

5:30

EUR

French Consumer Price Index (MoM) (AUG)

0.3%

-0.4%

Low

5:30

EUR

French Consumer Price Index (YoY) (AUG)

2.0%

1.9%

Low

5:30

EUR

French CPI - EU Harmonized (MoM) (AUG)

0.3%

-0.5%

Low

5:30

EUR

French CPI - EU Harmonized (YoY) (AUG)

2.2%

2.1%

Low

5:30

EUR

French CPI Ex Tobacco Index (AUG)

-

121.94

Low

6:45

EUR

French Current Account (€) (AUG)

-

-3.4B

Low

8:30

GBP

Visible Trade Balance (£) (JUL)

-8500M

-8873M

Medium

8:30

GBP

Visible Trade Balance Non EU (£) (JUL)

-5450M

-5718M

Medium

8:30

GBP

Trade Balance Total (£) (JUL)

-4200M

-4496M

Medium

8:30

GBP

DCLG UK House Prices (YoY) (JUL)

-1.2%

-2.0%

Low

8:30

GBP

Consumer Price Index (MoM) (AUG)

0.6%

0.0%

Medium

8:30

GBP

Consumer Price Index (YoY) (AUG)

4.5%

4.4%

High

8:30

GBP

Consumer Price Index Core (YoY) (AUG)

3.0%

3.1%

High

8:30

GBP

Retail Price Index (AUG)

235.9

234.7

Low

8:30

GBP

Retail Price Index (MoM) (AUG)

0.6%

-0.2%

Low

8:30

GBP

Retail Price Index (YoY) (AUG)

5.1%

5.0%

Low

8:30

GBP

RPI ex Mortgage Int Payments (YoY) (AUG)

5.2%

5.00

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3424

1.3750

GBPUSD

1.5713

1.5922

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