Joint Bond Hopes Drive Euro Rally, RBNZ Holds

Hopes for additional Eurobonds sparked a rally in the euro and risk appetite on Wednesday. The euro and yen were top performers with CAD and AUD lagging. The RBNZ held rates at 2.50% early in Asia-Pacific trading. Ashraf's Premium trades hit their targets in S&P500 & EURGBP.

Downgrades to French banks and a disappointing US retail sales report were pushed aside as the market clinged to the idea that Eurobonds can solve the regions woes. The speculation came after European Commission leader Barrosso said he will present several options on Eurobonds, some of which wont require a re-write on European treaties. German Fin Min Schaeuble didnt rule the idea out. He said Germany is against it but will wait to hear the proposals before deciding.

These developments were enough to spark a 150 pip rally in EUR/USD and a 1.3% climb in the S&P 500. The gains came despite a flat reading in US Aug retail sales (vs. +.2% exp). Ex-autos missed by a similar margin and the July figures were revised lower.

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Were skeptical. Firstly, commodities flashed a opposing signals with oil and copper both down more than 1%. Secondly, bonds were generally sidelined and a US T-Bond auction showed a strong demand for safety. Third, risk FX outside of EUR did not take part in the rally.

The Australian dollar has been particularly interesting this week. It has declined in three straight sessions despite three consecutive days of solid gains in stocks. This divergence cannot persist as the positive correlation in AUD and the S&P500 over the past month has been nearly 91%. There are rumours of a large sovereign seller of AUD and this makes sense. It would be confirmed if AUD falls dramatically on a risk off day.

RBNZ Decision

The RBNZ held rates at 2.50% as was widely expected. Similar to the RBA, the central bank cited external risks to global growth. NZD/USD immediately fell 50 pips but regained a portion of the losses shortly after. The upshot for NZD was that the RBNZ said rates could rise if global worries dont persist. The negative factors were a downgrade to the 2012 domestic growth forecast and a continued effort to jawbone NZD lower.

The lone release of note remaining in the Asia-Pacific session is the Melbourne Institutes measure of Australia inflation expectations for the next 12 months at 0100 GMT. The prior reading was 2.7%.