Two headlines were enough to stimulate euro bulls and spur demand for the shared currency, providing the impetus for the movement to the upside towards the key mark at 1.2960, from levels below 1.2890.
In the first place, the BoJ, commanded by M.Shirakawa, has half-fulfilled its promises of further stimulus in the Japanese economy, adding ¥11 trillion to its asset purchase programme, considered insufficient by the market participants, thus triggering the risk-on mode seen in the onset of the European trading hours. Secondly, and according to estimates, the economic activity in Spain has contracted 0.3% QoQ in the third quarter, unchanged from the previous print, and falling 1.6% over the last twelve months, marginally below expectations, however deeper than the -0.4% registered before.
With the attention turned to the U.S. and the fallout of the Hurricane Sandy, it may be normal that headlines pointing to a deeper contraction of the Spanish GDP - on a yearly basis - could drive the EUR/USD higher, just because the print bettered estimates! Have market participants forgotten that the contraction seen in the second quarter was only 0.2? What about retail sales dropping to a stunning 10.9% according to the last reading? Lest we also make mention of the fresh record of the unemployment rate at 25%?
As such, this much different reality has not yet echoed in the domestic debt market, bolstering President Mariano Rajoy's strategy of buying time: he actually ruled out a call for help after yesterday meeting with its Italian peer Mario Monti. According to UBS FX Strategy, "what is preventing a request is that bond market pressure on Spain has now lifted, due to Spain's strategic and EU-supported efforts to retain access to private funding. Encouraged by Germany, the Spanish government is naturally drawn to the view that it can get by without aid".
… 1.2830 could be the line in the sand?
Actually, there shouldn't be much talking about a significant pullback in the cross, mainly if we view Spain as the main catalyst of the near-term price action, as the ECB OMT programme would act as a net. Another scenario would be if we add the increasing tension between Germany and Greece, which has lately prompted investors to start re-thinking about the "Grexit."
Expert Karen Jones at Commerzbank remarks that the cross is still under pressure. "The uptrend has been eroded and attention is on the 1.2803/35 (200 day ma and October low) … Failure here would be viewed as negative, and target 1.2472/33." She adds that any correction higher would find resistance at 1.3025/84 en route to 1.3140/80
The Swiss bank UBS remains neutral on the cross, confirms analyst Gareth Berry, "important support lies at 1.2802, a break below would be bearish in the short-term triggering deeper sell-off to 1.2741."
… What Wednesday brings to the table
The eurozone docket will kick in with Consumer Spending in France, followed by German Retail Sales and Italian and EMU preliminary inflation figures and unemployment rate. The Debt market in France will see a key 10-yr bond auction, although no major news are expected.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.