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Risk FX Remains Pressured in Wake of Mixed Italian Auction

Last updated 12/29/2011 6:26 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Italy sells 7 Billion 10 yr at just below 7%
• Cable hit hard by end of year insurance payments breaks 1.5400
• Nikkei down -0.29% Europe flat
• Oil at $99/bbl
• Gold slides further to $1548/oz.

Overnight Eco

• EUR Money Supply (NOV) 2.0%
• EUR German Consumer Price Index (MoM) (DEC P) 0.8%

Event Risk on Tap

• USD Initial Jobless Claims (DEC 23) expected at 370K
• USD Continuing Claims (DEC 16)
• USD Pending Home Sales (MoM) (NOV) expected at 1.4%

Price Action

• USD/JPY at 77.85 as 77.50 holds
• AUD/USD quiet below 1.0100
• GBP/USD pushed much lower on insurance payments as 1.5400 gives
• EUR/USD test 1.2900 again post Italian auction

Currency markets were slightly lower in the wake of Italian 10 year bond auction at the next to last trading day of the year. Italy was able to auction off approximately 7 Billion euro of 10 year bonds at just below the key 7% level in mid-morning European trade today but the reaction in FX was somewhat  mixed as the bid to cover ratio was 1.3 and the yield was 6.97%.

Earlier in Asia the EUR/USD hit a fresh low of 1.2875 as traders remained on edge regarding the Italian auction, but today’s results suggest that despite deep concerns about investor demand Italy is still able to finance the long end of the yield curve albeit at much more expensive rates. While yesterdays’ short term paper saw its yield nearly halved from the peak in November, today’s reduction in yields on the longer maturity bonds was decidedly more modest at 60bp from their November highs.

Overall today’s Italian auction data shows that the world’s third largest bond market remains under stress but may be slowly receding from the panic levels recorded in November. The EUR/USD tested the 1.2900 figure in the aftermath of the news but held support for the time being and if risk flows prove supportive into the North American open the pair could stage a short covering relief rally towards 1.2950. Still, the euro remains dangerously close to its yearly lows of 1.2840  and the shorts could make another concerted run at that level if equities turn negative as the day proceeds.

In UK the calendar was empty but cable took a heart stopping plunge dropping more than 100 points off its Asian session highs after reported end of year sales by insurers. The pair broke below the recent lows of 1.5408 and remained under pressure into the North American open. However, unless sterling sees more technical selling the pair could rebound back to 1.5450 if risk flows pick up.

In North America today the calendar carries the vast majority of event risk for the week including weekly jobless numbers Chicago PMI and Pending home data. Given the improvement in Empire and Philly readings the Chicago number could surprise to the upside as well which should prove positive for risk and could spur some short covering in deeply oversold high beta currencies. 

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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.