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Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

Christopher Vecchio, CFA, Senior Strategist


The Euro is finding footing this morning after a better than expected Italian bond auction has cooled fears of an all-out onslaught in the bond market (that, and of course, the European Central Bank’s OMT safety net, which was the propellant for the EURUSD rally off of the July 24 low at 1.2041). But concerns remain, as the bond auction showed: the Italian treasury sold €2.5B of 5-year notes and €4B of 10-year notes, meeting its goal; but the 10-year notes were sold at an average yield of 4.83%, versus 4.17% at the previous auction on January 30.

Thus, while it’s clear that sovereign credit risk is rising again – perhaps even better illustrated by the performance of Gold in Euro terms, up by +2.28% this week so far – what’s less clear is what happens to the split Italian government. In a column for Bloomberg View, economist Megan Greene outlines the four potential scenarios that could emerge now; needless to say, there’s not combination that would produce a long-standing, stable government. Based on my own opinion, I believe there’s a growing consensus that new elections will have to take place at some point in the next few months.

As general unease is rising – the VIX has risen from 12.08 on February 19 to as high as 19.28 on February 25 – it appears that the dash from high beta currencies and risk-correlated assets to lower yielding, ‘safer’ currencies is beginning. I typically look to the Japanese Yen and the commodity currencies for confirmation of these rising concerns. Indeed, the Yen is now the top performer during February, while the Australian and New Zealand Dollars have been the worst two performing currencies since the close on Friday – yes, worse than the Euro despite the Italian elections, and worse than the British Pound despite its downgrade by Moody’s Investors Service on Friday. Understandably so, if you’re not cautious yet, you should be.

Taking a look at European credit, peripheral yields have rebound if only slightly, as investors calm down after the Italian election. The Italian 2-year note yield has decreased to 2.123% (-2.1-bps) while the Spanish 2-year note yield has decreased to 2.708% (-6.0-bps). Likewise, the Italian 10-year note yield has decreased to 4.841% (-4.3-bps) while the Spanish 10-year note yield has decreased to 5.287% (-5.6-bps); lower yields imply higher prices.


JPY: +0.41%

EUR: +0.33%

CHF: +0.17%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.09% (+0.10% past 5-days)


Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_7.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.


Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_6.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

EURUSD: No change: “The pair has broken the major uptrend off the July and November lows, breaking at 1.3200/20 yesterday, leading to a cataclysmic sell-off into the January swing lows at 1.2995/3035. Although the EURUSD is near oversold conditions, we note that momentum amid political distress tends to supersede RSI. If 1.2995 breaks, a move into 1.2875 and 1.2660 shouldn’t be ruled out. “

Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_5.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

USDJPY: No change: “The Bull Flag turned out to be a topping pattern, with the 92.30-94.80 range breaking to the downside. Now, with momentum heading lower, and significant event risk on tap, further selling into 90.00/20 would not be a surprise. Barring a collapse in Treasury yields (specifically, the 2s10s spread), the USDJPY remains a long-term buy.”

Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_4.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

GBPUSD: No change: “Selling persists amid weak data, a dovish and divided Bank of England, and the United Kingdom losing its revered ‘Aaa’ rating. The opening gap this week was filled at 1.5160 after opening at 1.5072, suggesting that further downside may be in the cards. With uncertainty prevalent on the horizon – the US budget sequester coming on Friday – and the Federal Reserve tilting more hawkish, it’s possible to see a break below 1.5000 this week. With the ascending trendline off of the 2009 and 2010 lows breaking, as well as the 2010 to 2013 range bottom lows breaking near 1.5300, my bias is to sell rallies.

Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_3.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

AUDUSD:No change: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. The pair is sitting at the 100% extension at 1.0265 now, and a break implies a deeper setback towards 1.0135/75, early-September and –October swing lows, as well as the 161.8% extension. Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible. Price has struggled further to overcome this level. I’m still looking for a move into 1.0135/75.” Selling has persisted as anticipated despite a two week respite; interaction in the 1.0135/75 zone is key for future action. I anticipate a violent break for a move below parity.

Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_2.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

S&P 500: No change: “The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality. The setback has started, with the S&P 500 reversing sharply off of 1530, and putting in a daily Bearish Key Reversal yesterday. Time to start looking lower. Support comes in at 1500 and 1475. Resistance is 1520 and 1530.” 1475 is in focus now – the post-QE3 announcement highs in September.

Aussie_Kiwi_Losses_Accelerate_as_Euro_Steadies_After_Italian_Bond_Auction_body_Picture_1.png, Aussie, Kiwi Losses Accelerate as Euro Steadies After Italian Bond Auction

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

--- Written by Christopher Vecchio, Currency Analyst

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