Wating for Another Shoe to Drop

The major currencies are consolidating in yesterday's broad trading ranges, but the "real" action is in the European bond markets, with acceptable auctions in Spain and France, helping support of a bond market rally that was already underway, encouraged by yesterday's step to increase access to dollar funding.   

Egan-Jones cut France's credit rating yesterday and Fitch made some cautionary remarks today but French bonds have launched an impressive rally that has brought the benchmark 10-year yield 25 bp lower, bringing the premium over Germany in by a dramatic 60 bp over the past 5 sessions. 

Spanish and Italian benchmark 10-year yields are off 20 bp.   Greek and Portuguese are not participating in the bond market rally today.  Gilts are not either, but that is partly a reflection of the unwind of the safe haven plays and a stronger than expected Oct CIPS manufacturing survey.  At 47.6 it was better than the 47.0 consensus, though is still the lowest in a couple of years. 

Asian shares rallied, though this may have been in response to the yesterday's  PBOC reserve cut, which was unconnected with decision to cut the punitive rate to access dollar funding, and also perhaps in response to the monster rally in the US yesterday.  Chinese stocks posted their biggest rally in 5 weeks.     The Korean won and India's rupee were the best performers, gaining nearly 1.5% against the greenback.  Good foreign demand for equities was noted, though the out sized gains in the currencies are likely need some backing and filling. 

The euro needs to break above the $1.3550 area to signal a continuation of the short-covering recovery.  Baring this, consolidation is the likely theme of the day.  Support is seen in the $1.3400-20 area.    Sterling is under-performing the euro today, with resistance seen near $1.5750. 

The Australian dollar has rallied nearly 7% against the dollar since Nov 25 low.   It is stretched, and the near-term price action will indicate whether it is sufficiently so to be a selling opportunity.  If so, ideally, the $1.0250 area holds now.  If it doesn't, it could signal a move toward $1.0350 first.