Spanish yields cross 6% threshold

Forex News and Events:

Merkel’s Cabinet approved today the ESM following the Karlsruhe court ruling, marking yet another step forward in the setting-up of the fund. The news comes a few hours after the Financial Times published a report overnight about the use of the European Stability Mechanism, the permanent fund succeeding the EFSF in the process of Spanish bank recapitalization. The German, Dutch and Finnish finance ministries issued a joint statement saying ESM bank recapitalizations should “only apply to new cases” and banks should use the ESM as a lender of last resort. Should the conditions apply, Spain will have a hard time resorting to the ESM in order to find liquidity and will probably be pushed to ask for a bailout. Spanish 10-year sovereign yields are up nearly 27 basis points today, breaching the 6.00% significant level for the first time since September 18th. Spanish yields have been evolving in a horizontal fashion with a slight upward bias as investor sentiment weakened and after the ECB announced its bond-buying program, triggering a 127 basis point drop in three trading sessions. Europe’s third largest economy, Italy has been holding up pretty nicely in comparison to debt-laden Spain and even though retail sales were worse than expected on both a yearly and monthly basis (-3.2% vs -0.8% consensus & -0.2% vs 0.0% consensus), yields today at the 6-month BOT auction were lower than the prior auctions, averaging at 1.503% but with a deteriorating bid-to-cover ratio of 1.39 vs. expected 1.69. Prime Minister Mario Monti affirmed a couple of days ago at an OECD meeting that Italy would be coming out of two consecutive years of recession and will probably post positive growth in 2013. His statement is quite different from that of most economists who predict a slower recovery for Italy and other European countries. Gold is looking for its best quarterly gain since Q2-10, boosted by central bank increase in long positions, especially those of emerging markets. The rally started after the Fed, ECB and Japan decided to increase stimulus in order to bolster economic recovery. Gold rose 11.46% between August 15th and September 14th and has since maintained the gains, trading sideways in the $1752-$1787 range.

Today's Key Issues (time in GMT):

2012-09-26T00:00:00 EUR GE 10-Year Bund Auction
2012-09-26T08:00:00 EUR IT Retail Sales (MoM)
2012-09-26T09:10:00 EUR IT 6-Month BOT Auction
2012-09-26T12:00:00 EUR GE CPI (YoY Prelim)
2012-09-26T14:00:00 USD US New Homes Sales
2012-09-26T14:30:00 USD US Crude Inventories
2012-09-26T16:15:00 USD US Chicago Fed Evans Speech
2012-09-26T17:00:00 USD US 5-Year Note Auction

The Risk Today:

EURUSD Further erosion of optimism around Spain (not helped by images of riots) and European policymakers strategy has deepen the sell-off in EURUSD reaching a low at 1.2856 in Asia. As we mentioned in prior reports the clearing of demand at 1.3029 opens the way for a critical test of 1.2825 / 50 support (breach would open a further downside extension to 1.2754). The first levels of demand are located at 1.3058 (20th Sept high), 1.3172 (14th Sept high), and 1.3283 (1st May high). Next levels of key supply located at 1.2825 (13th Sept low & 200d MA), 1.2754 (10th & 11th Sept low), 1.2507 (100d MA), 1.2463 (31st Aug low), 1.2386 (14th & 17th Aug high), 1.2241 (10th Aug low), 1.2160 (13th July low), 1.2046 (25th July low), 1.2000 (psychological support) then 1.1870 (7th June low).

GBPUSD GBPUSD’s sell-off extended to lows of 1.6182 overnight, but it now appears that bids ahead of 1.6143 key support are stalling, but definitely not stopped, the downside progress. We expect a challenge of support , a break which would trigger and extended weakness to 1.5918. The supply zone is located at 1.6143 (28th Oct 11’ pivot), 1.5970 (18d MA), 1.5918 (4th Sept breakout level), 1.5745/53 (30th July pivot & 100d MA), 1.5665 (uptrend channel floor), 1.5564 (8th Aug low), 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low). The next offers are located at 1.6300 (30th April high) and 1.6454 (29th Aug ’11 top).

USDJPY USDJPY is once again looking heavy, with the pair dropping perilously through key support around 78.00 on its way to 77.66 low. As risk appetite wanes and Japanese policymakers threats falling on deaf ears (although it has slowed the pace of deprecation), we would anticipate a resumption of bearish pressure to 77.13. We suspect that the true intervention level is located below 76 (Feb low). The next bids can be found at 77.13 (13th Sept low), 76.58 (3rd & 17th Jan low) then 76.03 (1st Feb low). Resistance is located at 79.12/20 (20th Aug & 19th Sept high), 80.11 (5th July reversal top), 80.62 (2nd May high), 81.60 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40.

USDCHF USDCHF further recovered some of its recent losses with a high of 0.9403 this morning yet we are still unconvinced that what we are seeing in a reversal or just a correction. The momentum is still with the bulls and is likely to remain that way as there is a clear lack of supply ahead of 0.9470 downtrend channel top. The next levels of resistance are located at 0.9355 (14th Sept high), 0.9580 (7th Sept high), 0.9661 (22nd Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), 1.0000 (psychological resistance), 1.0070 (1st Dec 11’ pivot high), 1.0149 (2010 pivot), then 1.0294 (10th Sept 10’ high). The first levels of support should be located at 0.9238 (14th Sept low), then 0.9194 (7th & 11th May low) and 0.9043 (1st May low).

Resistance and Support: