By Dean Popplewell
Price action in FX continues to be range bound ahead of the busy September schedule and helicopter Ben’s highly anticipated speech tomorrow in Jackson hole. Some investors, in lieu of event risk, have been reversing tactical long risk positions funded in EUR while others are hoping that the single unit is still capable of probing its key resistance levels ahead of 1.26. Asian and European equities have also been trading on the back foot, as investors mulled the possibility of further monetary easing by the Fed. The main attraction this morning made its debut in Italy, as the country ended its summer break in conventional debt issuance.
Italian bond yields rose on Thursday in the run-up to the launch of a new 10-year bond that found willing bidders, underscoring the country’s high borrowing costs. Italy returned to the market after a month-long absence with the new bond, sold at a yield +5.82%, alongside auctions of an existing five-year bond (+4.73%). Demand was relatively solid as Italy does not seem to be seen at risk of being bailed out as Spain does. The sale follows successful auctions of shorter-term debt earlier this week, which was mostly supported by the prospect of the ECB unveiling details of an imminent new bond-buying program for the struggling peripheries. With a successful Italian auction out of the way, FI dealers will now have to focus on Spain, which still has to come to market next week in a relatively uncertain environment.
Europe continues to spew weaker data and this morning was no exception. Confidence amongst the eurozone consumers (-24.6 vs. -21.5) and businesses (86.1 vs. 87.9) fell to its lowest in almost three years last month, well below the Street's expectations and suggests that the economy has further to fall. The euro fiscal crisis continues to shatter periphery confidence where individuals and businesses are mostly affected by high unemployment and tough austerity measures.
Adding to the downbeat mood was data that showed the number of German unemployment claims rose for a fifth consecutive month in August. The number of claims rose by +9k, mostly as a result of the economic slowdown of Europe’s official “crutch.” The total number of unemployed rose to +2.905m from an unrevised +2.876m print in July.
Even the BoE could not deliver any better news this morning. Fresh data shows that lending to U.K. households was subdued in July, which obviously highlights the ongoing credit shortage that policymakers are hoping to end with new innovative schemes that hope to further encourage lending. The CBank said that the number of new home loans approved in the U.K. ticked up in July from an 18-month low (+44.1k). Even net mortgage lending was +GBP1.1b, compared with a fall of-GBP200m a month earlier. However, net lending to businesses shrank-GBP200m on the month. The BoE FLS scheme opened for business on August 1 and its objective is to channel cheap funding to banks. It will take awhile to see results.
The EUR market remains in overbought territory, consolidating below the 30-upper Bolli-band now just above the psychological 1.26 handle, which if breached, could trigger another nasty short covering run like that seen earlier in the week. However, there remains natural layers of resistance up to the figure which should keep the natural bias to the downside. The retail sector, which has built up the largest net short EUR in some time, is in danger of being taken out of these positions a tad quicker if EUR upside momentum persists, as they may have shorted the market a little too early. Perhaps the EUR is really starting to lose momentum with the lack of higher highs now stretching back to August 23?