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FOREX: Euro Selling May Return on Germany, Portugal Bond Auctions

FOREX: Euro Selling May Return on Germany, Portugal Bond Auctions

2012-01-04 07:13:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • US Dollar Recovers in Asia, Commodity Bloc Bears Brunt of Selling
  • German, Portuguese Bond Auction Outcomes Take Spotlight in Europe
  • Eurozone CPI to Hit Four-Month Low, May Boost ECB Rate Cut Bets
  • S&P 500 Futures Point to Risk Aversion, US Factory Orders on Tap

The US Dollar (ticker: USDollar) recovered against most of its leading counterparts in overnight trade as currency markets digested yesterday’s selloff that saw the greenback slide 0.9 percent against the majors, marking the largest daily drop in two weeks. The Australian Dollar underperformed, down as much as 0.5 percent against its US namesake. The likewise sentiment-linkedCanadian and New Zealand Dollars were not far behind, down as much as 0.4 percent apiece.

Looking ahead, the spotlight turns to a pair of bond auctions in Germany and Portugal. Berlin will sell €10 billion in 10-year paper while Lisbon will offer €1 billion in 105-day bills. Traders will keep a close eye on average yield levels and bid-to-cover readings – a measure of demand – to get a sense of sovereign solvency fears in the region as Eurozone countries face the need to refinance a whopping €157 billion in maturing debtjust in the first three months 2012.

Conflicting cues abound. The 3-month Euribor-OIS spread, a measure of liquidity risk, fell to the lowest in two weeks yesterday, meaning credit market conditions have improved. On the other hand, the ECB reported that banks parked €446 billion in its deposit facility yesterday, just shy of the record €452 billion on December 27, meaning most of the nearly €500 billion banks borrowed via the 3-year LTRO has yet to begin moving into the real economy to offer any viable funding relief. All told, markets will have to wait for the auctions’ outcome for greater clarity.

On the data front, the preliminary estimate of December’s Euro Zone CPI reading headlines the docket, with expectations calling for the annual inflation rate to drop to a four-month low at 2.8 percent. The result may bolster expectations that the European Central Bank will reduce benchmark interest rates or introduce new non-standard easing measures to head off fears of a credit crunch and stoke sagging economic growth, weighing on the Euro. As it stands, markets are pricing in a 40 percent probability of a rate cut at the policy meeting coming up on January 12. Final revisions of the December set of German and region-wide Services PMI numbers are also on tap.

On the sentiment front, S&P 500 stock index futures are trading meaningfully lower in late Asian hours, hinting at the return of risk aversion that offers a lifeline to greenback at the expense of stocks-correlated currencies. US Factory Orders figures will come into the picture in the afternoon. Expectations call for the largest increase since July, fueling hopes that improvement in the world’s largest economy will help offset slowdown in the Eurozone and China – the other leading engines of global GDP expansion – and boost risk appetite anew.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:50

JPY

Loans & Discounts – Corp (YoY) (NOV)

-0.4%

-

-0.8%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:45

EUR

French Consumer Spending (MoM) (NOV)

0.3%

0.0%

Low

7:45

EUR

French Consumer Spending (YoY) (NOV)

-1.8%

-0.9%

Low

8:45

EUR

Italian PMI Services (DEC)

45.3

45.8

Low

8:50

EUR

French PMI Services (DEC F)

50.2

50.2

Low

8:55

EUR

German PMI Services (DEC F)

52.7

52.7

Medium

9:00

EUR

Euro-Zone PMI Composite (DEC F)

47.9

47.9

Medium

9:00

EUR

Euro-Zone PMI Services (DEC F)

48.3

48.3

Medium

9:30

GBP

Purchasing Manager Index Construction (DEC)

52.0

52.3

Medium

9:30

GBP

Net Lending Secured on Dwellings (NOV)

0.9B

1.3B

Low

9:30

GBP

Net Consumer Credit (NOV)

0.3B

0.0B

Low

9:30

GBP

Mortgage Approvals (NOV)

52.8K

52.7K

Medium

9:30

GBP

M4 Money Supply (MoM) (NOV)

-

-0.3%

Low

9:30

GBP

M4 Money Supply (YoY) (NOV)

-

-2.7%

Low

9:30

GBP

M4 Ex OFCs 3M Annualised (NOV)

-

5.0%

Low

10:00

EUR

Euro-Zone CPI Estimate (YoY) (DEC)

2.8%

3.0%

Medium

10:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (DEC P)

0.3%

-0.1%

Low

10:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (DEC P)

3.2%

3.3%

Low

10:00

EUR

Italian CPI - EU Harmonized (MoM) (DEC P)

0.2%

-0.1%

Low

10:00

EUR

Italian CPI - EU Harmonized (YoY) (DEC P)

3.5%

3.7%

Low

10:15

EUR

Germany to Sell €10B in 10-year Bonds

-

-

High

10:30

EUR

Portugal to Sell €1B in 105-day Bills

-

-

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2962

1.3108

GBPUSD

1.5544

1.5775

--- 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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