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EUR/USD Rallies Back to 1.3500 On Better EZ Bond Auctions

Last updated 12/1/2011 5:58 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Good Spanish Auction results boosts EUR/US through 1.3500
• Weak Retail Sales weigh on Aussie in Asia
• Nikkei up 1.93% Europe down 0.11%
• Oil above $100/bbl
• Gold $1754/oz.

Overnight Eco

• AUD Retail sales 02% vs. 04%
• AUD Building Permits -10.7% vs. 1.5%
• EUR Final PMI 46.4 vs. 46.4
• UK Manufacturing PMI 47.6 vs. 47.1

Event Risk on Tap

• USD Unemployment Claims 390K vs. 393K
• USD ISM Manufacturing 51.6 vs. 50.8

Price Action

• USD/JPY tests 77.50 but bounces
• AUD/USD weaker data drives it to 1.0150 before rebounding to 1.0240
• GBP/USD shakes off weak PMI to retake 1.5700
• EUR/USD retakes 1.3500 post good Spanish auction

EUR/USD recovered towards the 1.3500 figure in midmorning European trade today in the wake of well received bond auctions from both Spain and France. The Spanish Treasury was able to auction off the full 3.75 Billion allotment with bid to cover ratios averaging a much better 2.7 versus 1.8 the period prior. The yields on the 2017 bonds were 5.5444% versus 4.782% the auction prior  which was still considerably higher, but the rate of increase in Spanish yields has started to decelerate indicating that credit conditions in the region may be easing as investors are no longer demanding exorbitant risk premia to hold peripheral debt.

The news provided a small boost to risk currencies which were under some pressure earlier in the day due to lackluster economic data out of Asia. In Australia Retail Sales missed their mark for the second month in a row printing at 0.2% versus 0.4% eyed in a sign that consumers Down Under are turning decidedly cautious  as sentiment continues to weaken. Growing concerns over the slowdown in economic growth in Asia Pacific region as well as dwindling labor market demand have clearly dampened consumer appetite as sales declined for the third month in row.   

In addition to weaker than expected numbers on the consumer front, the data  for Building Approvals proved to be major disappointment as well with demand tumbling by -10.7% versus forecasts of 3.5% rise.  Overall the news points to a considerable cooling in the Australian economy and suggests that the RBA is likely to reduce its benchmark by at least another 25bp to 4.25% in the near future. In China the official Manufacturing PMI reading dropped below the key 50 boom/bust line printing at 49.0 for the first time in 2 years, also weighing a bit on investor sentiment.  

The Aussie dropped to a low of 1.0150 in late Asian trade before rebounding to 1.0230 post EZ bond auctions. The pair remains highly correlated to risk appetite and could mount another run towards the 1.0300 barrier despite lackluster economic results if equity flows prove supportive as the day progresses.

In North America the calendar carries jobless claims and ISM Manufacturing report due at 15:00GMT. The market forecasts a rise in ISM reading to 51.6 from 50.8 the month prior and if the data surprises to the upside much like yesterday’s Chicago PMI report it could provide the foundation for further rally in equities propelling EUR/USD through the key 1.3500 level. Yesterday coordinated move by G-10 central banks and today’s better than expected results from EZ bond auctions suggest that for the time being the pressure in European credit markets has eased providing a more positive environment for EUR/USD longs as risk appetite returns. The pair therefore could push higher as the day proceeds targeting 1.3600 as late shorts are forced to cover in wake of easing tensions in the market.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.