Sovereign Bond Markets Continue To Attract Attention

Posted by: Piper Joshua / On: November 19, 2011 / No Comments »

Fx markets remain hostage to shifting headlines and persistent evidence of contagion in european debt markets. Deeply concerning to traders is the aggressively rising funding costs across europe. Yesterday’s spanish 10yr bond auction came in at 6.975 (out pacing the recent Italian auction), while bid to cover was an uninspired 1.54. In Italy, the new technocratic government, lead by Prime Minister Monti, took a big step forward by passing his first confidence vote. In his prepared remarks to the senate, Monti would look to reinforcing fiscal discipline, assist potential growth, and move forward a more populist agenda by setting taxes. Italian government yield spreads vs. German counterparts, rallied somewhat in reaction to Monti’s statements, but still remain extremely wide. However, the optimism was short lived after comments from the opposition, suggested that their support would be withdrawn, should Monti adjust certain tax on individual earnings. In addition, with media highlighting student protests in Italy, traders are speculating if reform and austerity measures can actually be pushed through before a wider general election is demanded. The ECB, through it’s SMP, continues to take an active role in the secondary Europe sovereign debt market. Currently, the ECB action has been aimed at stabilizing the markets, rather then actually lowing yields. And as a result, their balance sheet is expanding aggressively. On one side of the debate, are those that say the ECB should completely become Europe’s “lender of last resort”. However, Germany and many within the ECB reject this strategy. Angela Merkel stated that even if the ECB should take on this role, it would not solve the eurozone crisis. She then went on to say that treaty changes must be made that would require deep budget integration and fiscal integration. But the market is fully aware that any treaty change would take months and would be unlikely to stave off the crisis playing out right now. Today, will be a light day for scheduled events and economic releases, which will keep traders watching for further erosion in risk sentiment as seen through the rates, equity and commodity markets. Dodging random headlines and rumors will be the name of the game today. ECB President Mario Draghi will be speaking and traders will be listing for any clues of how the new chairman feels on the recent expansion in the ECB’s bond purchases. On a final note the saga of the Troika continues with further reports that the next tranche will not be delivered until december and only if demand measures are meet. This doesn’t give Monti much time. Earlier in the week demands by the EC for a written commitment by greek policy makers to push forward with reforms was rejected. A move that hurt european (and IMF) confidence that they were just handing out cash. The Trioka will arrive in Athens today to resume talk with the next government and review progress.

12:00 CAD CPI, % m/m (y/y) Oct; exp: 0.1 (2.8), prev: 0.2 (3.2)
13:30 CAD Leading indicators index, % m/m Oct; exp: 0.1, prev: -0.1
15:00 USD Leading indicators index, % m/m Oct; exp: 0.6, prev: 0.2

The Risk Today: EurUsd EURUSD consolidation continues in a broad 1.3420 and 1.3555 range, but with sentiment so fragile and the data calendar pretty barren today, it seems likely that jumpy sideways price action will continue into the weekend. Even if we get a prolonged period of consolidation, expect sellers to create big headwinds on the topside; first at 1.3556 (16 Nov high), then 1.3641 (15 Nov high). The upper edge of the current downtrend that comes in around 1.3715-25 today should cap. If we continue to slide lower (our base case scenario), next supports are eyed at 1.3422 (17 Nov lows), 1.3360-70 (lower edge of current downtrend), 1.3362 (7 Oct low), 1.3242 (6 Oct low) and 1.3146 (4 Oct low).

GbpUsd Better UK data yesterday finally allowed the selling pressure to ease off GBPUSD, taking it up from the 1.5691 lows and back above 1.5800 levels today. In spite of this benign recovery, it seems far-fetched at this stage to expect a full-blown reversal higher. There are plenty of resistance levels on the topside, starting with 1.5905-15 (upper edge of 1-week downtrend), 1.5932 (15 Nov high), 1.6093 (11 Nov high), 1.6130 (9 Nov high), 1.6166 (31 Oct high) and 1.6206 (6 Sep high). If the sell-off resumes (as we expect it will), watch for next supports at 1.5683 (20 Oct low), 1.5632 (18 Oct low), and 1.5614 (61.8% Fibonacci level of the last major rally).

UsdJpy USDJPY is flirting dangerously with the downside and thereby the threat of renewed BoJ intervention, with the overnight selling pressure taking us below 76.80 support. There is now a gaping void below us before next support comes into play, a factor made all the more significant because that next support is the post-war record low 75.58 (seen on 31 Oct). It cannot be ignored that the last time we hit that level the BoJ were swift to step in and intervene, but in case they are not there to backstop the sell-off this time, there should still be massive support waiting at 75.00 (major psychological barrier). First resistance level on the topside is now 77.15 (16 Nov high), followed by 77.50 (15 Nov spike high), 77.89 (9 Nov high), 78.29 (4 Nov high), 78.46 (1 Nov US session high), 79.00 (1 Nov early spike high), and 79.54 (31 Oct high).

UsdChf USDCHF has been on an impressive bullish run over the past 4 weeks, but after hitting a high of 0.9237 yesterday morning, the pair has started to consolidate rather than pushing on to fresh highs. While the uptrend remains intact, we still believe the next move will be higher; first major level above is 0.9315 (6 Oct high), and above there we venture into territory not seen since the first half of the year; 0.9369 (9 Mar high), and 0.9506 (22 Feb high). Key supports are noted at 0.9140 (16 Nov lows), 0.8953 (11 Nov low), 0.8923 (9 Nov low), 0.8762 (3 Nov low), the significant 200-day moving average (now 0.8697) and 0.8611 (31 Oct low).

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