Despite the lack of new information from the ECB, the "successful" bond auction in Portugal, Spain and Italy (was that the ECB on the bid?) saw intra-EuroZone sovereign spreads contracting powerfully today, which helped the EURUSD to strengthen, though far less than one would imagine would be the case, and EUR reached new lows vs. CAD and CHF today before rallying a bit later in the day. One possible explanation for the underperformance of the Euro relative to today's news: the market sees the spreads as less relevant now because the ECB is likely on the bid for European sovereign debt, and with risk appetite making a strong comeback today, the inferior growth outlook for Europe and rates that are likely to remain low for some time makes other, higher growth .
But this looks like the EUR shorts are trying to have their cake and eat it, too at the moment: the speculative market is carrying a gargantuan short Euro position and one has to suspect that the only thing that could push the Euro further south is strong additional pressure on those sovereign debt spreads and general financial stress conditions in Europe. With the last two days' developments, the odds are infinitely higher for a dramatic squeeze higher in the Euro - probably across the board (outside of the riskier EM currencies if risk appetite generally remains strong here...). The flip side of this trade is Gold, which is closing sharply lower on the day. That EUR/gold trade was extremely popular as well - watch gold as a coincident indicator.
Chart: Euro vs. Italy & Spain to Germany debt spread
A basic look at the spread of Italian and Spanish 10-year debt vs. the German Bund shows the dramatic tightening over the last two days, and yet the EUR weakness (this is a Euro TWI, not EURUSD) has accelerated. This can't continue - either the spreads blow out again or the EUR shorts get squeezed here.
A basic look at the spread of Italian and Spanish 10-year debt vs. the German Bund shows the dramatic tightening over the last two days, and yet the EUR weakness (this is a Euro TWI, not EURUSD) has accelerated. This can't continue - either the spreads blow out again or the EUR shorts get squeezed here.
Chart: CADNOK
EURCAD is at a new all time low today, and CADNOK is at an all time high. NOK has been weak on the combination of the recent risk aversion and its exposure to the EuroZone and weak EUR, but this chart shows how CAD has been overly rewarded relative to the most basic fundamentals - interest rate spreads (here the 2-year, which includes much of the forward central bank expectations). Since both countries also have an exposure to oil prices, one has to imagine that this chart mean reverts regardless of the direction in risk appetite.
EURCAD is at a new all time low today, and CADNOK is at an all time high. NOK has been weak on the combination of the recent risk aversion and its exposure to the EuroZone and weak EUR, but this chart shows how CAD has been overly rewarded relative to the most basic fundamentals - interest rate spreads (here the 2-year, which includes much of the forward central bank expectations). Since both countries also have an exposure to oil prices, one has to imagine that this chart mean reverts regardless of the direction in risk appetite.
Looking ahead
Risk definitely making an impressive stand today, though we have had a number of false starts recently, and the bulls have plenty of proving to do if they want to get something going here. The 1100 area (approximately the 200-day moving average) in the S&P500 is an extremely important resistance level for risk broadly speaking. In USDJPY, this 200-day moving average remains intact, as does the upside Ichimoku resistance. A bit interesting that we didn't see even more JPY weakness on a day like today - a very mysterious day in general. It was also remarkable that today's very strong US 30-year T-bond auction resulted in bond yields settling higher today - that's a bearish signal for bonds and JPY unless we get an immediate reversal in the coming day or two.
Risk definitely making an impressive stand today, though we have had a number of false starts recently, and the bulls have plenty of proving to do if they want to get something going here. The 1100 area (approximately the 200-day moving average) in the S&P500 is an extremely important resistance level for risk broadly speaking. In USDJPY, this 200-day moving average remains intact, as does the upside Ichimoku resistance. A bit interesting that we didn't see even more JPY weakness on a day like today - a very mysterious day in general. It was also remarkable that today's very strong US 30-year T-bond auction resulted in bond yields settling higher today - that's a bearish signal for bonds and JPY unless we get an immediate reversal in the coming day or two.
GBPUSD looks like it wants to challenge the 1.4750 resistance and enter the old 1.4750-1.5500 range. But let's see what tomorrow brings.
Stay careful out there.
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