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Euro Blows Past 1.3400 Post Italian Auction

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Top Stories

  • UK Consumer Credit weak, mortgage up, M4 contracts on weak financial sector
  • Italian auction avoids 8% send EUR/USD through 1.3400
  • Nikkei up 2.30% Europe lower by -0.86%
  • Oil at $97.83/bbl
  • Gold at $1710/oz.

Overnight Eco

  • JPY Retail Sales 1.9% vs. 0.7%
  • JPY Household Spending -0.4% vs. -1.4%
  • JPY Unemployment Rate 4.5% vs. 4.2%
  • GBP Nationwide HPI 0.4% vs. -0.1%
  • GBP Net Lending 1.03B vs. 1.0B
  • GBP M4 Money Supply -0.3% vs -0.2%
  • GBP Mortgage Approvals 53K vs. 52K

Event Risk on Tap

  • USD S&P Composite Schiller expected -3.0% vs. -3.8%
  • USD Consumer Confidence expected 43.9 vs. 39.8
  • CAD Current Account expected at -11.3B vs. -15.3B

Price Action

  • USD/JPY comes off session highs to trade below 78.00
  • AUD/USD rallies through parity in late Asia, early Europe
  • GBP/USD trades best of all targeting 1.5600 despite mixed data
  • EUR/USD blows past 1.3400 post Italian auction

Risk FX exploded higher today with EUR/USD taking out the 1.3400 handle in mid morning European trade on investor enthusiasm over the Italian auction despite the fact that Italy had to pay some of the highest rates in more than a decade in order to sell its bonds. Italy sold more than 8 Billion euros in 3, 8 and 10 year bonds with rates ranging from 7.28% to 7.97%. The 7.97% yield on its 3 year bonds was the highest rate since 1997. Nevertheless, Italy avoided crossing the key 8% barrier and was able sell the full allotment with bid to cover ratio of 1.5.

The fact that EUR/USD was able rally off such dubious results from the Italian auctions says more about the oversold conditions in the FX market than it does about the underlying strength of the currency. As we noted earlier, "The latest data from CFTC has shown that euro shorts hit their highest level since June of 2010 indicating that the market may be deeply oversold. Therefore, the EUR/USD may continue to shrug of bad news while rallying on any shred of positive data until the market weeds out the weak shorts and works off the oversold condition"

After its initial burst higher EUR/USD has found resistance at the 1.3420 level - a zone from which it broke down last week. The longs will no doubt try to press the pair higher aiming to take out stops at the 1.3500 figure. However, we doubt the rally in the EUR/USD could be sustained much beyond that point unless EZ policymakers make some progress on resolving the credit crisis in the region. Italy cannot afford to lock itself into 7.5% yields when it rolls over more that 300 Billion EUR of debt next year and EZ officials will need to find some way to ameliorate that burden.

Meanwhile the eco calendar was very quiet tonight with only EZ business confidence and UK data on the docket. As expected EZ confidence slipped further dropping to 93.7 versus 93.9. In UK meanwhile the data was mixed with M4 money supply contracting by -0.3% from -0.2% eyed. On annual basis it dropped by -2.7% - the worst performance since records began indicating that economic activity especially in the key financing sector remains lethargic. Cable ignored the news rising along with the rest of high beta currencies to hit 1.5650 in late morning London trade.

In North America today the economic news is sparse, but risk flows may get a boost from Consumer confidence figures if they beat estimates. The markets is anticipating a rise to 44.00 from 39.8 the month prior, but if the data surprises to the upside it could confirm the thesis that US recovery may be gaining strength. USD/JPY has retraced much of yesterday's rally in overnight trade but remains above the 77.50 level and could make another run at 78.00 if US data proves supportive.

FX Upcoming

Currency GMT EST Release Expected Prior
CAD 13:30 8:30 Current Account -11.3B -15.3B
USD 14;00 9:00 Case Schiller -3.0% -3.8%
USD 15:00 10:00 Consumer Confidence 43.9 39.8

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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