EUR under pressure despite product out the door

When one trades close to the ‘core’ of negativity for such a long period it’s not impossible to be a tad cynical with some of yesterdays moves, being month-end and all. November was the month to own the dollar and US treasuries while again lightening up on equities and periphery bonds. Whats December to bring us? Yesterdays Central Banks efforts to ease borrowing costs shows their immediate power gives the markets a jolt, but when its comes to finding a solution to the Euro debt crisis, that is another issue.

Policy makers have yet to stabilize the sovereign-debt situation. This will most likely require the ECB to buy bonds, and thats beyond what they’ve been willing to do or what Germany is allowing them to do. Italy’s bond yields need to fall below +6% to calm the debt turmoil. France and Spain both came to the market this morning, issuing EUR4.5b and EUR3.75b respectively.

Spain again had to pay up to persuade investors to buy their product. This will most likely be the pattern for 2012. However, stronger demand pushed Spanish yields to their lowest level in two-weeks and happened to drag the EUR to a session high. Most importantly, the Spanish treasury got the product out the ‘door’, deeming the auction a success. The country’s funding outlook appears set to remain ‘challenging’. It’s domestic banks are in trouble, growth has slowed to a crawl and unemployment is the highest in the Euro-zone. Analysts and the market expect the country’s situation to only get worse. France, l’enfant terrible in the AAA elite Euro-class, is not without its own problems.

The last 36-hours has seen a plethora of activity. Will it change the medium term FX trading strategies of many? It certainly can be described as information overload and can be highlighted as thus:

• Most of the world’s major central banks (Fed, ECB, BoE, BoJ, BoC and SNB) agreed that they would take “coordinated actions to enhance their capacity to provide liquidity support to the global financial system.” Specifically the Banks have cut the price on existing temporary US dollar swap arrangements to USD OIS plus 50bp which is a cut of about 50bp from what is currently charged. It will apply this from December 5 to February 1 2013.
• They agreed to set up bilateral liquidity swap arrangements to cover any of their own currencies should that be needed.
• The PBoC played follow the leaders, and stepped in to cut their reserve requirement-50bp to +21% (the first cut in three years). This would suggest that China’s policy makers are more concerned about growth than inflation. It’s natural for the market to look for further easing next year.
• US fundamentals are again doing their bit. The ADP employment report suggested that jobs rose +206k last month, a hefty +76k above consensus. Pending home sales surged +10.4% in October and the Chicago PMI rose to 62.6 from 58.4.
• Europe did their bit and chipped in with the Germans managing to post a lower unemployment rate, +6.9% in November from +7%.
• Japan saw a bounce in its IP release, while India reported another solid GDP in Q3 (+6.9%).
   

All these are positives, but they do not get to the core of the European issues. Their problems will disrupt the rest of the worlds growth profile if they are not dealt with soon. The scary part is that we don’t know precisely how much Euro policy makers have as ammunition to tackle the root cause? If they require the IMF that will be a confidence issue. Next up is the December 9 summit. Is anyone bringing a bazooka?

This morning the market will focus on US ISM manufacturing and expects an improvement to 52.0 from 50.8 in October. Yesterdays Chicago PMI surprised to the upside and tends to be a leading indicator for ISM manufacturing. Unemployment claims are expected to squeeze a tad higher to +405k. All we will have to wait for is tomorrows NFP release. Do not bet on it being an easy ride!

Other Links:
World’s Largest Central Banks Joining EUR Debt Fight

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