Talking Points

• Euro Appears Vulnerable on Italian and Dutch Bond Auction Outcomes
• Germany to Release Updated Set of Macro-Economic Forecasts for 2012
• Australian Dollar Sinks After CPI Disappoints, Boosting RBA Rate Cut Bets

The Euro is in a precarious position as markets set sights on the outcomes of Dutch andItalian bond auction and the release of updated macro-economic forecasts from the German Economy Ministry. Rome will sell zero-coupon 2014 debt as well as inflation-linked 2017 and 2019 paper while Amsterdam puts 2014 and 2037 bonds on offer. Traders will be keeping a close eye on average yields for signs of returning sovereign stress.

The auction comes amid rising worries that anti-austerity sentiment is fueling political instability in the region and may undermine debt-reduction efforts. French President Nicolas Sarkozy lost the first round of his reelection campaign to anti-austerity challenger Francois Hollande over the weekend while Dutch Prime Minister Mark Rutte and his cabinet resigned yesterday having failed to reach agreement on further deficit-reduction measures.

Meanwhile in Germany, an updated set of the government’s official economic forecasts will be sized up against yesterday’s sharp drop in April’s manufacturing- and service-sector PMI readings. Officials cut their 2012 GDP growth outlook to 0.7 percent in January from 1.0 percent predicted in October of last year. Another reduction may prove to weigh on risk appetite – boosting safe haven currencies such as the US Dollar and Japanese Yen – as the dominant theme across financial markets remains the degree to which a recession in the Eurozone will derail global output as a whole.

The Australian Dollar underperformed in overnight trade, slumping as much as 0.8 percent against its leading counterparts, after Consumer Price Index figures fell short of economists’ forecasts and reinforced expectations of an RBA interest rate cut at next week’s policy meeting. The report showed the annualized inflation rate fell to 1.6 percent in the first quarter, the lowest in two and half years.

More ominously still, the 1.5 percentage point drop from the 3.1 percent rate recorded in the three months through December 2011 marked the largest quarterly decline in over a decade. The markets now price in the certainty of a 25bps decrease in the benchmark lending rate with a slight possibility of a larger reduction, according to data compiled by Credit Suisse. The 12-month outlook now implies 110bps in overall easing.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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