Intraday Market Thoughts

Euro Regains $1.25 Despite Multi-Bank Downgrade, AUD Eyes RBA

by Adam Button
Jun 12, 2012 23:23

When all said and done, EURUSD ended the day higher despite a new Eurozone-era record in Spanish 10-year yields. Indications that G20 policymakers will take steps to stem the European crisis elevated hopes on Tuesday. The New Zealand dollar led while the yen lagged as risk trades improved. The Asia-Pacific session features comments from the RBA governor. Ashrafs take on yields is below. Cable longs hit all targets, while longs in EURUSD and USDCAD remain in progress. More below in the final paragraph.

Spanish 10-yr yields hit a new Eurozone-era record of 6.83% after Fitch downgraded 18 Spanish banks, while adding that further Eurozone sovereigns remain under threat.

Here is from Ashraf: The latest run-up in Spanish yields drives up the spread over German 10 yr yields to 5.39%. It took 10 days of +5% spread between Spanish & German 10-year yields before Spain obtained a bailout. It took 16 days of +5% Greek spread over German yields for Athens to obtain its 1st bailout; 24 days of 5% Irish spread over German yields for Dublin to get bailed out; and 34 days of +5% Portuguese spreads over Germany before Lisbon was saved.

Comments from German and Mexican officials suggested the G20 hopes to adopt a plan to fight the European crisis at the meeting on June 17-18. The market is building expectations for greater IMF and EU funding backstops. This is a dangerous assumption because international meetings rarely end with grand bargains and action.

The overall optimistic theme clashed with a continued rout in the Spanish and Italian debt markets. Ten-year Italian yields hit 6.30% and the Spanish counterpart hit 6.85% (up from 6.01% at the weekly open).

The euro was relatively quiet. A fall to a fresh weekly low at 1.2439 failed to inspire follow-through selling and EUR/USD rebounded to 1.2506. The pound was especially buoyant and trades near the highest levels of the month.

The early focus in the upcoming session is on RBA governor Stevens as he speaks at an economic forum in Brisbane. At 2350 GMT, Japan releases April machine orders. Economists expect a 4.9% y/y rise after the 1.1% decline in March.

Only one of the long GBPUSD was filled and hit all targets, while the other was unfilled. EURUSD, GBPUSD, AUDUSD, USDCAD and gold remain in progress. Distinguishing between the short and medium long term in these trades remains key. Direct Access here: sub01/access/?a=645 Non subscribers can join here:

-AB & AL


Latest IMTs