By Dean Popplewell
The EUR bears can be thankful that Sarkozy cannot keep his own thoughts to himself. Stating the obvious, that a strong single currency hurts exporters, and its value should be discussed with the ECB, has woken up a market that other wise would have slept until tomorrows Spanish funding requirements. This week is a tough auction week for Euro members. Germany had 2-year product to shift today and Spain and France come to the debt market tomorrow. Spain auctions 2′s and 10′s, while France has interest in 2′s,3′s and 5′s. German product, with the ultra low yields, is beginning to struggle to attract strong demand but is unlikely to have a strong affect on the EUR. Why? With the desirable Bunds, investors in this environment tend to prioritize safety over returns. It's Spain that everyone is focused on. It's this auction that will set the tone for investor periphery demand and if the single currency warrants another meltdown.
Betting has begun that the rise in Spanish borrowing costs could force the ECB to resurrect its bond-buying program to prop up the EU's fourth largest economy and end one of the most delicate of phases of this European debt crisis to date. Investors worry about contagion. Deepening of Spanish problems could quickly spread, thus far, investors are not sold on the size of Europe's +EUR500b fund being large enough to prevent contagion to Italy's "massive" Euro bond market.
Even within the ECB itself, there seems to be some opposition to resuming bond buys. Despite this, FI investors are trading with caution, with one eye on the chance that the CBank will step in to lower Spanish yields. Market hesitance is rather similar to the SNB cowering over FX trades around its 'floor.' Prudent position keeping has some spec investors reducing some of their short bets and also seem to be slowly putting their money to work other assets that carry higher risk and greater reward.
To date, the ECB has bought more than +EUR200b of peripheral debt by way of its SMP over the last two years. By issuing more than +EUR1t of cheap LTRO loans since December, up to this point, has calmed trading in this asset class and stopped bond buying in recent weeks. There seems to be a peripheral divide amongst Euro bureaucrats to use again the bond buy program. Obviously, the weaker south see it as an effective way to tackle the crisis, while the fiscally stronger north disagree. Internal fighting on how to steer the ship after hitting an iceberg helps no one, it only makes it more politically difficult for Draghi to find consensus on most things.
Where does that leave the EUR? The longer that no official guidance is put forth, the quicker the single unit will take out this weeks lows just below 1.30. The techs will tell us that the bullish momentum is weaning on the charts and overbought levels are about to be tipped. The market again seems to be looking to sell fails ahead of a possible return lower. That said, an optimist still believes in a white knight and the tooth fairy!