Turn Around Tuesday Falls Flat

The counter-trend moves often seen on Tuesday is falling flat today. The euro fell to the $1.3145 before finding a bid. A break here will target the $1.3045 area, the 61.8% retracement of the euro's rally that began in early June 2010, the last time the euro was below the $1.20 level. On the top side, the $1.3225-50 may be sufficient to cap.

Sterling has not been helped by the weaker than expected construction PMI. The 50.1 reading compares with consensus expectations for 51.5 and August's reading of 52.6. Gilts are rallying strongly as speculation increases of renewed asset purchases. 10-year gilt yields are off 11 bp and the 30-year gilt yield has fallen 14 bp.

The Australian dollar is under new pressure following the RBA's statement that lower inflation could prompt a rate cut. The RBA's statement ironically followed news of a much larger than expected trade surplus and a surge in building approvals. The August trade surplus surged to A$3.1 bln from A$1.8 bln in July (consensus A$2 bln) and build approvals rose 11.4% not the 1% the consensus expected. The July series was revised to show a 1.8% increase not the 1% initially reported.

Falling copper prices, for which the CME hiked margin requirements for the second time in less than 2 weeks and the general global anxiety and flight from risk is taking its toll. The next retracement target for the Aussie comes in near $0.9230, which is a 61.8% retracement of the rally from May 2010's low near $0.8067. Note that the Australian dollar's 50 day moving average is falling below the 200 day moving average today for the first time since last Sept.

The same moving averages crossed late last week in sterling and today the euro's averages are crossing. The dollar index's moving averages look poised to cross as well later this week. The Swiss franc and Japanese yen remain the notable exceptions to this general trend.

There are two main features in Europe today. The first is that Belgium and France have pledged to guarantee Dexia's financing. Part of the problem is that Dexia and France's two largest banks wrote down Greek exposures by 21%, as the private participation in Greece 2.0 entailed. Many other banks marked closer to market and took a 50% write down. The difference is about 3 bln euros. This comes of course on the heels of EU discussions that the private sector "voluntary" participation may require larger haircuts, closer to 50%, and this more than overshadows news of a collateral deal that appeases Finland.

The second development in Europe is news that the Troika (ECB, EU, IMF) will postpone the decision on the next tranche of aid until Nov 13, a month delay from the first delay. This puts even more pressure on the Oct 11 bill offering.

This is actually part of a larger story about funding needs left in the current year. Gross issuance this month is expected to be around 70 bln euros. However, there are almost 29 bln euros in coupon payments to be made and almost 47 bln euros in redemptions that will fund the purchases of the new issues. However, the euros freed up say in a German maturity might not really be available to Spain or Italy for example. Italy and Spain has reportedly covered about 3/4 of this year's financing as we start Q4 and both seem to be lagging behind last year's financing pace. Italy need to raise another 40-45 bln euros in bonds, depending on bill offerings. Spain has 20-25 bln euros of bonds to issue depending on privatization proceeds.

Strains are evident almost not matter where one looks. Overnight deposits at the ECB continue to rise and as of yesterday stood at 209 bln euros, the highest since July 2010. This compares to an average this year of almost 55 bln euros. Meanwhile overnight borrowing at the ECB, where banks pays 2.25% have nearly doubled to 1.4 bln euros, even though the demand at today's refi operation eased a bit.

Lastly, the Japanese yen and Swiss franc remain sidelined as if official action has effectively taken them out of the market. That leaves the greenback, scars and all, as the safe haven of choice.