Chop City in FX

The dollar remains largely confined to clear ranges against the euro.  The $1.30-$1.3240 range has dominated for the past 5-6 sessions.   It is difficult to have a strong view within the range.   Yet short-term momentum indicators warn of the risk of a euro bounce in North America today. 

Sterling has fared better, rising yesterday to its highest level since mid-November yesterday, but no follow through today.  Some may attribute the lack of follow through to the disappointing construction PMI, but it only accounts for 10% of UK GDP and sterling is still doing better than the euro. 

The greenback has not distanced itself from the JPY76.00 level, but the market is reluctant to push it below there for fear of BOJ intervention.  Yet intervention by the BOJ seems unlikely until at least new dollar lows are seen and that means below JPY75.35. 

The Australian dollar remains firm.  It extended its gains to a bit more than $1.0750 today, reaching its best level since the end of October 2011, encouraged perhaps by the larger than expected trade surplus and the better China PMI yesterday.  Chinese shares posted their biggest rise today in a couple of weeks.   The Reserve Bank of Australia is still expected to cut rates next week, its third cut in the cycle and the strength of the Australian dollar, if anything, makes it even more likely. 

Spain raised 4.5 bn euros in a bond auction the upper end of their desired range.  Yields came in lower than previously, but Spanish sovereign bonds sold off in the secondary market after the auction.  One of the main concerns at the end of last year was the ability of the euro zone sovereigns to rollover some 800 bln euros of maturing debt this year.  To date, the supply has been easily absorbed and this may have helped aid the euro recovery.   It is too early to make a judgment, but there is some fear that the buying as a result of the LTRO may have been front loaded.   

In addition, as we have noted February sees substantially more issuance relative to redemptions and coupon payments.  In fact, Italy's 27 bln euro redemption and 10 bn euro coupon payment yesterday largely exhausts the month's redemptions and coupon payments.  Yet it is noteworthy that with today's auction, Spain has funded almost a quarter of this year's projected needs.  Belgium and Austria have also ahead of the funding curve (~20% and 40% respectively).    

Separately France raised almost 8 bn euros in three different issues at lower yields and better bid-cover ratios.   The premium France pays over Germany for 10-year money has slipped below 115 bp for the first time this year.   European bonds are exposed to some headline risk as the EU parliament debates proposals advocating collective bond--Eurobond--which given Germany and other creditor reluctance--is a non-starter this year.