Intraday Market Thoughts

All Eyes on Spanish Auctions, IMF Warns Bigger Deleveraging

by Patrik Urban
Apr 19, 2012 0:21

Markets are already bracing for Thursday's Spanish 2 and 10-year auctions. The sale aims to raise between 1.5-2.5 billion euros. The two-year auction should be relatively well-subscribed because Spanish banks are estimated to have 30% of their LTRO still to invest. NZ CPI was in line with expectations. Japan trade data is next. Mondays Premium Trades saw our both EURUSD shorts and EURJPY longs hit all targets, with AUDUSD shorts in progress. See below for detail

The key is the 10-year sale. The benchmark borrowing rate has fallen to 5.82% after hitting a four-month high of 6.16% on Monday. We believe the fall comes due to the market anticipating a successful result.

This is a re-opening, meaning the government is adding to an already-existing benchmark. It was originally sold in November but the most-recent re-opening of this bond came Feb 8 with a yield of 5.40%.

There is already more than 11 billion euros outstanding in this issue so this auction will amount to only about 10% of existing supply -- an amount that should easily be swallowed below 6%. This, combined with a bid-to-cover ratio above 2.2 and more than 1 billion euros dedicated to 10s is a relatively easy feat to achieve and is likely to push the euro to the top end of its recent range at 1.32. A yield above 6% with a bid-to-cover below 2 is a red flag that would send the euro toward 1.30.

The results will be released at 0840 GMT

Wednesday’s US session was relatively quiet as the euro edged higher to 1.3120 from 1.3080. The pound was an outperformer due to the more hawkish comments from the Bank of England and EUR/GBP fell to a 19-month low.

An IMF report highlighted the enormous task of deleveraging European banks, saying they may have to sell $3.8 trillion in assets. This will create positive inflows into EUR, leading to inexplicable moves higher but it will eventually give way to long-term weakness.

The Asia-Pacific session has been relatively quiet with Q1 New Zealand inflation as expected at 1.6% y/y. At 2350 GMT, Japan releases trade balance numbers for March. A deficit of 223B yen is expected but export growth is more critical to the economy. A rise of 0.2% is expected.

Mondays Premium Trades saw our both EURUSD shorts and $EURJPY longs hit all targets, with AUDUSD and shorts & 1 gold short in progress. 1 oil long done it all targets & 1 oil short stopped out. Direct Access : Nonsubscribers can join here:


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