Risk-On To Continue With Spanish And French Auctions Likely To Provide Support
O/N BULLETS
- Japan FinMin Azumi threatens intervention if necessary, and will not ignore short-term speculative moves.
- Australian trade surplus increases to AUD1.7bn, higher than expected.
USD
Broad USD weakness continued yesterday as risky FX rallied. Yesterday's lower ADP employment change and marginally softer ISM manufacturing number had little impact on the risk-on move. Lower US yields have seen risk appetite improve, and equities and high yielding FX have performed well. JPY and CHF have also benefited vs USD due to a narrowing of yield spreads. The USD downside bias will likely continue in the absence of any negative news that could turn market sentiment around, but USD downside will likely be limited for now.
EUR
EUR/USD traded higher yesterday but struggled to break convincingly through the 1.32 level, reversing the weakness seen at month end. Today's Spanish and French auctions could attract some interest. There will likely be good demand for both auctions, with some focus on Spanish auctions; previous auctions exceeded targets allotments largely due to the ECB 3y LTROs, should we see this again today, it will provide further support for market risk appetite. EUR will continue higher should optimism surrounding Greece remain; but EUR/USD will likely struggle to break higher, convincingly through the 1.3250-1.33 area today.
GBP
GBP/USD rallied with the risk-on move yesterday. The stronger than expected PMI manufacturing number provided further support for GBP. But a similar move higher in EUR/USD saw EUR/GBP remain relatively unchanged. Today's Construction PMI will see little market focus. EUR/GBP will likely remain range bound but should the risk positive move continue and EUR/USD struggle to break higher, the EUR/GBP could edge marginally lower.
SEK, NOK
Strong Scandies PMIs saw NOK and SEK out perform yesterday. The Scandies have notably lagged behind the other risky currencies since the start of this year with weak sentiment towards Europe largely weighing on performance. AUD/Scandies has been trading higher since the end of last year, and has recently made new highs (since the 80s). We see potential for Scandies to catch up should sentiment towards Europe improve.
Spotlight - Improvement in peripheral spreads supporting EUR/USD - Portugal yields rose significantly earlier this week due to market fears Portugal could be the next 'Greece', but pressure has eased over the past few days. EUR/USD has been trading closely with peripheral spreads (chart below). While this trend was not so evident pre-spring 2011, it can be argued that previously it had been a Greek crisis, and only after Portugal, Ireland and recently Italy and Spain were brought to the fore have we seen a greater relationship between peripheral spreads and EUR/USD. The recent improvement in Spanish and Italian yields - largely help by an increased demand due to the ECB 3y LTROs has helped support EUR/USD. With another 3y LTRO due at the end of February we could a continuation in this trend.
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