Euro and Dollar Both Under Stress As Credit Concerns Dominate Trade

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Top Stories

  • ECB intervenes in credit markets supporting Spanish and Italian debt
  • Risk FX seesaws in wake of US AAA downgrade
  • Nikkei down -2.18% Europe stabilizes at 0.37%
  • Oil at $84.56/bbl
  • Gold breaks $1700 at $1704/oz. last

Overnight Eco

  • AUD ANZ Job Advertisements -0.7% vs. 3.8%
  • JPY Eco Watchers Sentiment 52.6 vs. 50.3
  • CHF Unemployment Rate 3.0% vs. 3.0%
  • EUR Sentix Investor Confidence -13.5 vs. 3.6

Event Risk on Tap

  • No Events on US Calendar

Price Action

  • USD/JPY below 78.00 as anti-dollar flows weigh
  • AUD/USD risk off weighs as 1.0300 tested before bounce to1.0350
  • GBP/USD holds up well as 1.6400 supports
  • EUR/USD 1.4400 caps to the upside and risk aversion sends it back below 4350 in early Europe

A very volatile night in the FX market as currencies opened for trade in the wake of Friday's post market close downgrade of US debt by the S&P. The initial move in Asia was decidedly anti-dollar with EUR/USD spiking to 1.4430 and USD/CHF sinking towards the .7500 level in very early Asian trade.

The euro was further boosted by the ECB announcement that it would intervene actively to support Italian and Spanish debt after those countries saw their borrowing costs rise above the critical 6% mark in the tumultuous market meltdown last week. The ECB stated that, "it will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions - taking account of dysfunctional market segments - and therefore to ensure price stability in the euro area."

However as the night progressed and ECB's intervention in the European credit markets eased the shorts returned with a vengeance pushing the pair below 1.4300 mark as concerns over EZ debt trumped the negative fallout from the S&P downgrade. As we noted earlier, "Italy represents the third largest bond market in the world and if the ECB cannot stem the tide of panic selling the continued stress in the EZ credit markets will create havoc in the region and could derail the union's fragile economic recovery as confidence plummets. That's why the action in the EZ credit markets will prove critical to the near term direction of the EUR/USD today."

Confidence in the EZ economy is already starting to crumble as tonight's EZ Sentix investor survey showed the largest drop on record as the gauge fell to -13.5 from 5.3 the month prior. The index was projected to only show a small decline to 3.6 and today's very pessimistic print reflects the sense of uncertainly amongst investors in the region amidst very turbulent conditions in the credit markets.

That is why today's price action is shaping up as a battle of confidence between central banks and the bond vigilantes which continue to press the credit markets in Spain, Italy and perhaps France next. With no economic data on the calendar in North American session, the currency markets will continue to focus on the state of credit spreads as the day develops. Ironically enough, the historic US AAA downgrade story may be pushed aside as the EZ credit meltdown takes center stage. If yields on Spanish and Italian debt continue to climb above 6% the situation within the EZ will become critical and authorities may have to consider instant implementation of EFSF funds in order to calm the panic in the markets.

FX Upcoming

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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