FXstreet.com (Barcelona) - Financial market sentiment nose-dived overnight as the pain in Spain went from bad to worse. As Analyst Mike Jones of BNZ notes, “In addition, rising risk aversion ensured the ‘safe-haven’ USD and JPY outperformed against riskier options.” Spanish government bond yields hit fresh highs overnight as Murcia became the second Spanish province to ask for a bailout (following Valencia on Friday). At almost 7.5%, the 10-year yield is now well into the ‘bailout-zone’.

Unfortunately for investors, the bad news wasn’t just limited to Spain. Whispers the Italian region of Sicily may also be in trouble, and chatter the IMF is now refusing extra aid for Greece also unnerved investors. “Italian sovereign CDS spreads are now above 500bps, with Spain above 600bps – indicative of a market ascribing an increased probability of default.” he adds.

Against a backdrop of soaring risk aversion and commodity price weakness, investors flocked back to the relative ‘safe-haven’ of the USD and JPY. “We don’t think recent JPY movements could be construed as ‘disorderly’ and as such we doubt we’ll see intervention unless USD/JPY moves rapidly through 77.00.” Jones comments.
Looking ahead, whether the current backdrop of risk aversion and USD strength will be sustained may well depend on the relative strength of this week’s data.