Euro Squeezed Higher, Takes Others With It, Positive Newstream

Successful Spanish and Greek bill auctions and better than expected German IFO caught the market wrong-footed, if the record net speculative short at the IMM is anything to go by.  The euro has shot up to almost $1.3090 and pulled up the other major currencies and emerging market currencies in its wake.    The greenback also surrendered nearly all the gains scored amid the uncertainty immediately following the death of North Korean leader Kim Jong Il. 

The euro is stretched according to short term (intraday) technical studies and it has run into a wall of offers that run up toward $1.3150.    Sterling has moved tentatively through the $1.5630 area, a retracement objective.  Although markets are thin, a close above there will target the $1.5800 area.  

The Australian dollar is flirting with parity.  This seems be giving the clearest signal that follow through may be difficult in North America today.    Against the yen, the dollar have been confined to a 24 tick range in uninspiring turnover.    It is interesting to note that the dollar has not closed below its 20-day moving average against the yen since Nov 24.  It comes in today near JPY77.77. 

The cost of swapping euros into dollars is 113 bp below Euribor, which is the smallest gap since December 7 and shows a slight relaxation of tensions.  Like at last week's bond auction, Spain was able to raise more money at its bill auction than it anticipated (5.6 bln vs 3.5-4.5 bln euros) and a large decline in yields (3-month 1.74% vs 5.11% and on the 6-month bill 2.44% vs 5.23%) compared wiht last month's auctions. 

The German IFO was not just better than expected, but was better than the Nov readings.  The overall investment climate was 107.2 from 106.6 and compares with the consensus of 106.1.   Expectations were better at 98.4 from 97.3 and the current climate was unchanged at 116.7.     Ironically this report of improved confidence helped boost confidence and encouraged some risk-on plays, or the reduction of risk-off. 

Some observers had expected the unraveling of the ATT/T-Mobile USA deal for $39 bln to be euro negative, but what ever contingent risk had been hedged, it seemed absorbed by the market flows.  It is difficult to extrapolate from this case to the overall regulatory climate regarding anti-trust.   Also, M&A flows are interesting for all sorts of reasons, but the impact in the foreign exchange market is not always clear or obvious.  Sometimes, for example, companies may chose to borrow funds locally rather than buy the foreign exchange.  

Sweden's Riksbank delivered a 25 bp rate cut  to its key rate which now stands at 1.75%.  It is the first cut since 2009 and had hiked rates from mid-2010 to April 2011.   While raising its forecast for this year's GDP to 4.6% form 4.2%, it cut next year's from the 1.5% Oct forecast to 1.3% now.    The comments seemed somewhat less dovish, though two members wanted a more aggressive 50 bp cut.  The krona remains true to form by trading like a high beta euro--doing what the euro does, but more so. 

Lastly, news reports indicate that Japan has been talking to China about investing in its bonds.  Talks seem to be at an early stage.  Separately that Japan has formally increased the cap on funding for intervention to JPY195 trillion means there is scope for JPY65 trillion more intervention.  However, do not believe this is a meaningful limit on intervention, as when the cap approaches, it will be lifted again.