Euro Tests Above 1.30 vs. US Dollar as Spain Bailout Mechanics Emerge

The Euro probed above 1.30 against the US Dollar for the first time in six days as a Spanish official outlined the mechanics of an outright EU bailout effort.

Talking Points

• Euro Gains as Spanish Official Sheds Light on EU Bailout Mechanics
• NZ Dollar Slumps on Rate Cut Bets, Yen Sold as Risk Appetite Recovers
• Aussie Dollar Takes Dovish RBA Meeting Minutes in Stride, Pushes Higher
• German ZEW, Eurozone CPI to Yield Volatility if Outcomes Disappoint
• UK CPI, PPI Data Unlikely to Bring Fireworks as BOE Remains on Hold

The Euro pushed broadly higher as an article in the Wall Street Journal cited a Spanish official saying Madrid was nearing a formal EU bailout request (though he cautioned that a request for a rescue probably would not happen his week). The source also shed light the outlines of the arrangement, saying it would take the form of a “credit line” to be tapped if needed rather than an outright cash handout. The official went on to say that this coupled with access to the ECB’s bond-buying scheme is a sufficient backstop for Spain but hinted that the chief obstacle to its implementation is the EU’s agreement not ask for significant additional conditionality beyond the self-imposed austerity measures already at work.

The New Zealand Dollar and Japanese Yen underperformed. The former currency slumped after the CPI figures showed the annual inflation rate fell below the central bank’s target range to 0.8 percent in the second quarter, hinting interest rate cuts may be ahead. The latter came under pressure as Asian bourses followed Wall Street higher on the back of better-than-expected US retail sales data, denting safe haven demand. The Australian Dollar rose despite a seemingly dovish set of minutes from October’s RBA meeting that reinforced the argument for an interest rate cut. Traders seemed to latch onto comments suggesting the full effects of past easing have not yet filtered into the broad economy, hinting the central bank may adopt a wait-and-see posture in November.

Looking ahead, the German ZEW survey of investor confidence is in focus. Forecasts suggest that the index measuring respondents’ opinion about current conditions will fall for a fifth consecutive month while the forward-looking Expectations sub-index nudges slightly higher, though pessimists are still seen numbering optimists. With the Euro already on the upswing, a print in line or close to expectations is unlikely to yield a meaningful standalone effect. Volatility risks appear stacked on the downside in the event that the release underperforms, particularly if September’s final Eurozone CPI figure is revised lower, as such a result would boost ECB rate cut bets.

UK CPI and PPI data are unlikely to cause much of a stir given their limited implications for near-term BOE monetary policy as the central bank continues to gauge the impact of the latest QE boost and the FLS program. S&P 500 index futures are trading little changed, pointing to a lack of conviction on the risk appetite front. Sixteen members of broad US equity benchmark are due to report third-quarter results today, with freight transportation giant CSX Corpa possible standout in terms of offering guidance to risk trends given the company’s high degree of sensitivity to the global business cycle. US CPI data is also on tap, with the inflation rate expected to edge higher to 1.9 percent.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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

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