Friday, 13 January 2012

FOREX: US Dollar Under Pressure Amid Cooling Euro Debt Crisis Fears

The US Dollar (ticker: USDollar) declined against most of its major counterparts in overnight trade as Asian stocks advanced, sapping demand for the go-to safe haven currency. The MSCI Asia Pacific regional benchmark equity index added 0.8 percent after Italy and Spain held successful bond auctions yesterday. Rome sold €8.5 billion in 1-year bills, with average yields tumbling to 2.74 percent from 5.95 percent at an auction of similar paper in December. Madrid sold nearly €10 billion in new debt – twice the targeted amount – with average yields on 3-year notes falling to 3.38 percent from 5.19 percent in December. Meanwhile, the ECB deposit facility saw its fist drawdown in five days, with banks parking €15.3 billion less with the monetary authority (for a total of €471 billion) than the previous day (the record-high €486 billion). Taken together, these developments encouraged hopes that the nearly €500 billion that the ECB lent Eurozone banks in December was actually making its way into financial markets, bearing down on borrowing costs and helping high-debt member states refinance maturing obligations at sustainable rates, thereby reducing the chance of a default within the currency bloc. Supportive rhetoric at yesterday’s ECB monetary policy meeting has also helped. Bank President Mario Draghi said policymakers were seeing “tentative signs” of stabilization in the economy, albeit warning of “substantial downside risks” still in the mix. Perhaps most importantly, Draghi said the ECB’s 3-year LTRO gave banks liquidity insurance, preventing a major funding constrain and going to far as to directly address concerns that funds provided through the facility were being hoarded in the ECB’s deposit facility. On this front, Drahi said the banks that borrowed through the LTRO were not the same as those pushing deposits to record highs, adding that the bank is seeing that money flow into the broad economy. Looking ahead, the spotlight turns to another Italian bond auction, this time of longer-term paper across 2014-2018 maturities. Generally speaking, longer-term bonds are considered riskier (and so pay higher returns) because they expose their holders to larger periods of uncertainty, so another drop in average yield levels similar to yesterday’s bill sale will be an important encouraging sign. While the Eurozone crisis is far from resolved, there is plenty of profit-taking to be done on signs of reduced credit market stress after speculative net-short Euro positioning hit another record high last week. Later in the session, the University of Michigan gauge of US consumer confidence is expected to rise to the highest in seven months. Stock index futures are trading higher ahead of the opening bell in Europe, bolstering the case for an upswing in sentiment through the week-end and hinting the greenback will remain on the defensive against its risk-linked counterparts. The fourth-quarter earnings report from JPMorgan Chase may be a countervailing force however, with earnings expected to drop 34.7 percent to $0.901 per share. The forward-looking guidance component of the report ought to prove most interesting however as traders look for insight on US banks’ vulnerability to Eurozone sovereign stress. Asia Session: What Happened GMT CCY EVENT ACT EXP PREV 23:50 JPY Money Stock M2 + CD (YoY) (DEC) 3.1% 3.0% 3.0% 23:50 JPY Money Stock M3 (YoY) (DEC) 2.6% 2.5% 2.5% 3:00 CNY Foreign Exchange Reserves ($) (DEC) 3181.1B 3200.0B 3201.7B 4:00 JPY Bankruptcies (YoY) (DEC) -6.4% - 3.2% Euro Session: What to Expect GMT CCY EVENT EXP PREV IMPACT 9:30 GBP Producer Price Index - Input (MoM) (DEC) -0.2% 0.1% Low 9:30 GBP Producer Price Index - Input (YoY) (DEC) 9.1% 13.4% Low 9:30 GBP Producer Price Index - Output (MoM) (DEC) 0.1% 0.2% Medium 9:30 GBP Producer Price Index - Output (YoY) (DEC) 5.0% 5.4% Medium 9:30 GBP Producer Price Index - Output Core (MoM) (DEC) 0.0% 0.0% Low 9:30 GBP Producer Price Index - Output Core (YoY) (DEC) 3.2% 3.2% Low 10:00 EUR Eurozone Trade Balance s.a. (NOV) 0.5B 0.3B Medium 10:00 EUR Eurozone Trade Balance (NOV) - 1.1B Medium 10:00 EUR Italy to Sell 2014-2018 Bonds - - High Critical Levels CCY SUPPORT RESISTANCE EURUSD 1.2727 1.2932 GBPUSD 1.5285 1.5505

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