Spanish Bulls Chase EUR Higher

 |  Includes: AUNZ, FXA, FXB, FXC, FXE, FXF, FXY, UDN, UUP
by: Dean Popplewell

Forex markets are eyeing their brethren, the bond market, for direction. Spain and France both come to the market today and the success or not will ultimately decide the direction that the EUR will decide to undertake in the medium term. The "single" currency’s recovery over the past two quarters obviously has been strongly correlated to tighter peripheral spreads. Increased investors demand for yield has many pricing in a “constructive auction outcome,” especially after the successful outcome of Spain’s first bond auction for this year held last week.

Spain’s tough 2013 funding program got off to a good start in an auction last week when it sold more than its target amount. Today, Spain happened to offload +EUR4.5b worth of product, the upper end of their +EUR3.5b-4.5b target, allowing them to complete almost +9% of its 2013 medium and long term funding plan. The bid-to-cover ratio suffered a little, however, demand was still twice supply. Spanish issuance to date has been skewed towards the shorter-dated maturities that fall within the scope of promised European Central Bank intervention. This also makes the product attractive. The acid test for Spanish product will be to see how demand holds up further out the Spanish curve.

A sale of French bonds was also expected to meet decent demand as they offer higher yields than debt issued by safe-haven counterpart Germany. The EUR’s initial reaction, despite being bid prior to the Spanish auction, managed to touch new daily highs on the results. The market was obviously long going into the auction on constructive auction talk. Will investors now fade the results or be influenced by the broader risk appetite that should solidify support below? With a lack of European data on tap, markets' focus will likely switch to U.S. earnings once they have finally digested this morning’s auctions results.

Employment data down-under surprised with Aussie employment falling -5.5k in December. To an extent, the saving grace was the November gains being revised much higher to +17.1k from +13.9k previously. Collectively, the two-month employment gain was in line with consensus; however, all of the gain was in part-time jobs, while full-time employment fell. The unemployment rate rose to +5.4% from a revised +5.3% in November. It was no surprise to see the AUD wobble, despite global risk on the uptick. The currency has not fallen far enough to break out of this 1.05-06 trading range. Market stops are beginning to add up sub-1.05 towards 1.0480. The specs are short product while the corporations have remained consistent buyers. With EUR risk on the up, by way of euro officials rebutting Juncker’s comments yesterday, and similar reactions in Japan to oppose Amari’s comments, all support the AUD. We should expect the market to look towards China and Friday’s data for direction.

Many EUR punters remain flat, looking for a stronger individual conviction before entering the fray again. Stellar bond results have this EUR testing new highs and leaving many non-participants well behind. Many investors had been expecting the EUR to retest yesterday overnight downside levels again. However, current momentum remains well above the 21-DMA (1.3221). With the market remaining above this level has many investors looking to buy the single currency on dips, until proven wrong!

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