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Monday, 28 Nov 2011
European Debt Crisis Arrives in Germany
Germany's failed bund auction shows the European debt crisis has made its way to the core of Europe.
USD - USD Benefits from European Woes
Markets are being driven by events in Europe and as the debt crisis intensifies traders have been selling both the EUR and other higher yielding assets in favor of the USD. During Friday's debt auction Italy succeeded in raising its targeted amount of EUR 10 bn. However, the yield Italy must now pay to serve its debt is ballooning. Italy is currently paying 6.054% on 6-month notes, up from 3.535% at the end of October. The yields at these levels are astronomical and are unlikely to be sustainable. Also last week Fitch lowered Portugal's sovereign credit rating to junk status citing a large fiscal imbalance and risks to the Portuguese economy from EU-mandated austerity measures.
With the European debt crisis is escalating this has brought a renewed surge of USD inflows. The Dollar index is now trading at its highest level since October 4th. Higher yielding currencies such as the NZD and AUD have either broken or are currently testing their Q3 lows.
Despite the threat of another round of quantitative easing from the Fed the USD will likely continue to gain so long as the tensions in Europe remain elevated.
EUR - European Debt Crisis Arrives in Germany
Following the failed German bund auction last week it appears that the European debt crisis has progressed from affecting the periphery (Greece, Portugal, Ireland) to include the core of Europe (Germany, France, Italy). Italy's fiscal difficulties have been noted with the yield on the 10-year Italian BTP rising above 7%. But now demand for safe haven German bonds is beginning to sag. The failure of Germany to sell the complete offering of bonds from last should be considered a shift in investor confidence in German bunds.
German PM Angela Merkel has repeatedly voiced her opposition to both European bonds as well as the ECB serving as a lender of last resort. Last week's joint press conference with Sarkozy and Monti was the latest instance of Merkel's unwillingness to activate additional measures that may calm financial markets in the near-term. Merkel's suggestion of EU treaty changes would likely be a lengthy approval process, a luxury Europe does not have given the pressures that currently exist in the European bond markets. Thus it appears that the 2-year old debt crisis will continue on into December. This makes selling any EUR rally all that more attractive.
JPY - S&P Warns on Japanese Credit Rating
On Friday S&P said the Japanese administration has made no progress to reduce the nation's debt. This may be the first warning prior to a reduction of the Japanese sovereign credit rating. Comments from the sovereign ratings team at S&P said they are closer to a downgrade but the deterioration in Japan's public finances has been gradual. Currently Japan is able to borrow in the capital markets at ultra-low rates.
While a downgrade of Japan's credit rating may be considered a slap in the face, one only has to look at the move by S&P to downgrade the US. Despite the US losing its AAA rating from S&P the US still maintains the ability to borrow at low interest rates. This may not be due to the creditworthiness of the US but rather a lack of investment grade sovereign debt available in the world. With problems in the European debt markets a downgrade of the Japanese credit rating should not materially affect Japan's ability to borrow, nor should it affect the value of the JPY.
Crude Oil - Oil Prices Continue their Decline
The price of spot crude oil continues to decline following a brief push above the $100 level. Investors have been taking their cues from events in Europe which have dragged down market sentiment. A combination of political gridlock in Europe combined with credit rating downgrades of Portugal, Hungary, and Poland have all weighed on the investment horizon.
The sovereign debt crisis appears set to continue and traders may look to US economic data this week for signs of an improving US economy. The headline event will be Friday's non-farm payrolls report but crude oil traders should also be on the lookout for Thursday's ISM manufacturing PMI for signs of continued US economic improvement.
The EUR closed last week below the psychologically important 1.35 level and a close below it on the monthly chart will carry an even greater significance. Both monthly and weekly stochastics continue to fall and a break of 1.3210 will likely test the October low of 1.3145. Below here at 1.3040 there is the 61% Fibonacci retracement of the move from June 2010 to May2011 though this may only prove to be a mile marker in the new downtrend for the pair. Support is located at the January low of 1.2870. The November 18th high of 1.3610 stands out as resistance.
Falling monthly and weekly stochastics may have the GBP/USD testing the October low of 1.5270 as the pair is pulling within striking distance of its long term uptrend from the 2009 low which comes in at 1.5050. Any move higher will likely encounter heavy selling from the July pivot at 1.5780.
The downtrend for the USD/JPY remains firmly intact and only a break above 78.95 from the falling trend line from the 2007 high may reverse the pair's bearish technical sentiment. A break above this line may have the pair testing the most recent post-intervention high of 79.50, a level that coincides with the pair's 200-day moving average. To the downside the November 18th low of 76.55 is the initial support, followed by the all-time low of 75.56.
The USD/CHF is testing its October high at 0.9310 and a break here will likely open the door to the pair's 20-month moving average at 0.9460 and the February high of 0.9775. Initial support is located at the November 18th low of 0.9080 with a deeper move perhaps taking the pair to the November low of 0.8760.
The Wild Card
In text book fashion a previously supportive trend line that was broken has now turned into resistance. The NZD/USD has risen to 0.7550, back to its long-term trend line from the 2010 low. Forex traders should the downtrend continue Friday's low at 0.7370 will be the first test followed by the March low of 0.7115. Additional resistance is located at the May low of 0.7750.
|15:30||USD||Crude Oil Inventories||-4.5M||1.1M||-|
|01:00||AUD||HIA New Home Sales||1.2%||*||-|
|EUR||German Prelim CPI||m/m||0.3%||0.0%||-|
|01:00||EUR||Italian 10-y Bond Auction||2.60|1.5||*||-|
|02:30||AUD||Private Capital Expenditure||q/q||-4.2%||-0.8%||-|
|08:55||EUR||German Unemployment Change||-12K||-6K||-|
|09:00||EUR||M3 Money Supply||y/y||1.5%||1.5%||-|
|09:00||EUR||Italian Retail Sales||m/m||-0.7%||-0.2%||-|
|11:00||GBP||CBI Realized Sales||21||25||-|
|13:30||USD||Prelim GDP Price Index||q/q||2.0%||2.0%||-|
|15:00||USD||Pending Home Sales||m/m||-1.1%||0.6%||-|