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Talking Points

  • Italian Debt Sale in Focus as Eurozone Debt Crisis Fears Return
  • Japanese Yen Outperforms as Safe-Haven Flows Change Venue
  • S&P 500 Futures Suggest US Dollar to Pull Back After Advance

The US Dollar was little changed – digesting yesterday’s aggressive advance – but the Japanese Yen outperformed as risk aversion carried into overnight trade. Relative value considerations likely defined a preference for the Yen over the greenback as safe haven of choice: the Japanese has been drifting lower against the greenback since late November, making it a relatively cheaper alternative over the short term.

Looking ahead, the spotlight is on an Italian bond auctionyet again. This time, the Eurozone’s largest debt-crisis victim (so far) will sell €8.5 billion in 2014-2022 bonds. As usual, traders will be most concerned with prevailing yield levels and bid-to-cover readings for insight on the markets’ willingness to lend to Eurozone sovereigns and consequently those countries’ ability to meet their obligations and avoid default.

Yesterday’s 179-day bill sale proved generally supportive. Average yields fell to 3.25 percent from 6.5 percent while the bid-to-cover ratio rose to 1.69 from 1.47 in November. The result failed to contain Eurozone debt fears however after the ECB reported that its balance grew to a record €2.7 trillion, punctuating the increasing overreliance of regional credit markets on the central bank’s support.

Perhaps most ominously, the ECB also revealed that bank overnight deposits hit a record €452 billion, meaning most of the nearly €500 billion they borrowed through the 3-year LTRO just days earlier never left the banking the system. Worse, the ECB deposit facility pays just 25bps in interest while LTRO money costs 100bps to borrow, so banks are actually losing an annual 75bps by parking their money the ECB.

A willingness to do this reflects not only a lack of confidence in the stability of financial markets but in firms’ fellow banks as well. All told, this means the ECB’s attempt to loosen credit conditions by growing the loanable funds supply may run into the same problem as the Fed’s QE efforts: banks sit on their cheap cash rather than lend it out, dulling the hoped-for stimulus.

Against this backdrop and given the considerably longer tenor of Italian bonds on offer, today’s auction may prove significantly more market-moving than yesterday’s outing. S&P 500 stock index futures are ticking markedly higher, risk appetite is creeping back into the markets and suggesting investors are primed to see another improvement in borrowing conditions. While this argues for a pullback in safe-haven currencies against most of their major counterparts, it also means that surprise risk is on the downside, with price action producing a relatively stronger reaction if the auction disappoints than otherwise.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

No Data

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

9:00

EUR

Euro-Zone M3 s.a. (3M) (NOV)

2.8%

2.8%

Low

9:00

EUR

Euro-Zone M3 s.a. (YoY) (NOV)

2.5%

2.6%

Low

9:00

EUR

Italian Business Confidence (DEC)

93.7

94.4

Low

10:00

EUR

Italy to Sell €8.5bn in 2014-2022 Bonds

-

-

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2810

1.3043

GBPUSD

1.5281

1.5620

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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