Where to sell the EUR again?

Even with Euro risk sentiment remaining on the back foot, the Euro periphery bond deals are getting done, but at a price. Now that there are more sales coming down the pipe, more concessions will be expected. The market was not that impressed with Italy yesterday, however, she came and delivered. It's her 2012 issues we should be more worried about. Already this morning, Spanish bond yields managed to hold steady before the country's final debt sale of this year; while with no sign of the debt crisis easing, Bunds remained supported by investors seeking safer liquid assets ahead of year-end.

Spain auctioned +EUR3.5b bonds of varying maturities (2016, 2020 and 2021), in the last Euro-zone debt auction before the holidays. As expected, dealers happened to cheapen each issue before taking down the supply. Concession was not as forgiving as Italy's because Spain's ability to fund itself are “less acute than those surrounding Italy which faces redemption and coupon payments of around +EUR100b between January and April.” Spain has no major redemptions for another seven-months.

Thus far, no fundamental data this morning has been able to break this tight EUR price action. The market has had the privilege of digesting both Euro-zone employment and inflation. The number of people employed in the region fell in Q3 (-0.1% to +146.9m), while the annual rate of inflation was unchanged, and well above the ECB's target last month. CPI rose +0.1% from October, m/m, and +3% in November, y/y, leaving the annual rate of inflation in line with expectations. Even with inflation above the ECB's target level of +2% the market can expect Draghi to continue to ease policy in the coming months amid market concerns that the Euro region has/is entering a recession.

The SNB and BoJ have a tough battle ahead. Both Central banks have tried to think outside the box on how to dissuade investors from hoarding their respective currencies during times of economic stress. Historically, their currencies have been an investors safe haven choice, along with the dollar. It was not a surprise to see the SNB reconfirm the EUR/CHF floor at 1.20 this morning, even as it warned of a “highly uncertain international economic outlook,” stating that a “further escalation of the European sovereign debt crisis cannot be ruled out.” Swiss policy makers are ready to take action if growth outlook worsens and deflation risk rises. Hildebrand expects the CHF to weaken over time and growth slowing to +0.5% next year. The BoJ tankan report shows business sentiment among large manufacturers falling to-4, worse than the expected-2. The effects of a high yen and a slowdown in overseas economies continues to weigh on Japanese sentiment. This is the first dip from the index into negative territory since the earthquake. For both economies a stronger domestic currency is crippling business; their reluctance to weaken for safe haven reasons requires more of a firm central bank hand.

Despite the EUR falling to new overnight lows, the price action did not have the legs to cement a drop towards 1.29. Let's see if the European sessions failure in the 1.30's has generated new macro-sales orders on top.

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