This week was marked by a number of key debt auctions from eurozone nations, among which were Portugal, Spain and Italy. Speculation has it that Portugal is the next possible candidate to apply for an EU/IMF bailout. Concerns over possible demand levels and yields requested have caused the single currency to reach lows of 1.2873 against the US Dollar in the former part of this week – levels which were last seen in September 2010.
Most of the downside for the EUR/USD pair was made Friday evening, and trading earlier this week was quite range bound, staying between 1.2873-1.2990. The euro remained buoyed although still weak in support but not losing much fresh ground. On the other hand, the US dollar was unable to reach out for more significant gains. Restricting the greenback was last Friday’s US payroll data which came in much lower than had been expected although the figures were still growing. A sharp fall in the unemployment rate from 9.8 per cent to 9.4 per cent, however, saved the day and the US dollar ventured for new gains on Friday evening.
Keeping the euro afloat is Asian Forex reserve diversification, especially China’s remarks in support of European debt and in favour of reserve diversification. Japan mentioned that it intends to buy around 20 per cent of bonds that a European rescue fund plans to sell later this month.
However, remarks by Finance Minister Noda that suggested Japan would use its euro cash holdings to buy bonds dampened expectations that this move may involve fresh buying of euros. The euro remains weak trading below its 200-day moving average at around 1.3073.
A Portuguese bond auction was due to be held yesterday, January 12. The importance of this week’s bond auction stems from the outcome of last week’s Portuguese debt auction for six-month bills which cost the country 3.686 per cent as opposed to the 2.045 per cent paid at the previous auction. Despite the higher yield there was some comfort in the fact that the bid-to-cover ratio, which measures demand, came in higher.
This week’s debt auction was for five and 10-year bonds, and given the much longer time frame (when compared to last week’s six-month bills) one would expect much higher borrowing costs for Portugal. At the time of writing, results of the bond auction were not yet available.
This auction could be a decisive trigger on whether Portugal should opt for a bail-out or not. With Portuguese 10-year yield currently around 7.20 per cent and with possible EU/IMF aid generally in the region of 5.5 per cent, asking for aid could possibly start to seem a viable option. Prior to the auction yesterday, Portuguese Prime Minister Jose Socrates attempted to convince investors that Portugal was not about to seek a bailout by saying that the 2010 budget gap was lower than the 7.3 per cent of GDP target promised to the EU.
Data from the United Kingdom was not very supportive so far this week, with the Halifax House Prices index showing a decline of 1.3 per cent against an expected 0.4 per cent decline, and data for December retail sales showed that sales shrunk by 0.3 per cent (mostly attributed to the adverse weather and economic concerns).
Today we have data for industrial and manufacturing production and the BoE’s interest rate decision.
Against the euro, the British pound kept rather steady holding on to its four-month highs, the EUR/GBP pair trading in the range of 0.8285–0.8339 for the former part of this week. This may not only be due to the weaker euro, as some analysts are expecting BoE to give in to inflation pressures and raise interest rates in the coming months.
RTFX Trader Tip’s ‘Scenario for the Week’ sees the EUR/GBP potentially bearish aiming towards the 0.8188 level and after this fall there is a possibility of a recovery towards the 0.8474-0.8533 region.
News that the massive floods have raced towards Brisbane, Australia’s third largest city, has weighed significantly on the Australian dollar’s performance in the Forex market. The news prompted traders to take profits on the Aussie’s 28-year peak against the US dollar. Earlier this week the Aussie was down around 1.11 per cent against the USD, 1.44 percent against the Euro, and is also down 0.87 per cent against the kiwi and 1.03 per cent against the yen.
Upcoming FX Key events:
Today: EZ ECB interest rate decision, US PPI, UK BoE interest rate decision and Asset Purchases Target.
Tomorrow: EZ HICP, German CPI, US CPI and Michigan Sentiment.
FX Technical Key points:
EUR/USD is bearish, target 1.2588, key reversal point 1.3500.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bearish, target 1.5300, key reversal point 1.6300.
USD/CHF is bearish, target 0.9200, key reversal point 1.0000.
AUD/USD is bullish, target 1.0300, key reversal point 0.9600.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.