Bund Failure No Reason to Sell EUR
If it cannot go up surely its got to go down. How long can the 17-member single currency trade in this consolidated range with so much negativity piling up against it? Now that the quarter-end window dressing has come and gone, investors are back to spread and yield watching for market direction. This morning has not been an unfamiliar trading range with dealers again pressurizing the weaker EUR shorts by buying through layers of stops above 1.3120 to only hit offers into the 1.3150/60, while more lie in wait ahead of 1.32. Regional expiries are expected to reinforce yesterday's top, with fresh failure set to spark selling. This has been a rewarding routine play, expect it to continue until truly broke.
There has been a plethora of negative reasons on the ticker tape weighing on the EUR this week. Reasons ranging from the Chinese trade surplus make-up, where the surprise fall in imports has investors debating a ‘hard or a soft' landing for their economy, to the diverging mixed messaging on European growth from the OECD. However, the EUR's immediate woes can be attributed to the resurfacing of periphery sovereign issues. The ECB's LTRO seem to be wearing off. The recent rise in Spanish and Italian yields, especially following the poor Spanish auction results last week, points toward renewed EUR vulnerability as markets start to focus on the fiscal health and debt sustainability of Euro area sovereigns.
Spain has now become Capital Markets main focus of attention and fixed income dealers ‘new squeeze.' Italy is only one notch behind and comes to market tomorrow, it's here we will get to witness the current appetite for periphery product. The Spanish government has introduced a raft of tough austerity measures over the past few weeks, partly in an attempt to calm investors' nerves and bring yields down. It does not seem to be working. Yields are now at their highest level since the beginning of this year, but are still below the psychological +7% level considered by markets to be unsustainable. Comments yesterday by their central bank governor, Ordonez, suggesting that the banking sector may need further support if the economy deteriorates does not ensure much regional confidence. Expect the risk of growth disappointment coupled with further Euro sovereign bond or debt stress to keep the ECB along ‘the dovish trail.' If so, this will result in stronger market pricing for further easing policy accommodation from Draghi and company.
Are disappointing bond auctions becoming the new norm? A 10-year Bund and a 5-year Gilt both disappointed this morning. Currently, the more interesting of the two, was the technical failure of the German auction which went “uncovered.” It is the first uncovered auction this year, a function of miserable yields rather than signs that Germany having trouble selling its own debt. This morning's 10-year bund yield was +1.77%, the lowest on record. The immediate knee jerk reaction was to sell the EUR, a mistake, surely there are more compelling reasons to do so!
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