FX Update New EUR/USD lows: Italian Auction or End of Month/Year Fixing?

After several days of catatonic market “action”, volatility perked up yesterday and today with the Italian bond auctions and probably also due to an early start to end of month/year fixing flows in thin markets.

The Italian bond auctions today failed to inspire much confidence, though the result in yield terms was largely in line with the yields in the secondary markets. Italy managed to sell the maximum EUR 2.5B target for the 2022 bonds at a yield of just below 7% (6.98% to be precise), but was unable to sell the maximum target in its other issue, including an ugly shortfall for 2014 bonds, where only 1.13B of a hoped for EUR 2.0B were auctioned. The auction helped push EUR/USD lower still and EUR/JPY posted a fresh 10-year low close to the 100-mark. Still, direct cause and effect are a bit hard to measure in this market. After all, EUR/GBP was rather stable and even rose a bit immediately after the auction results were made clear before dropping again, so today's moves may be as much about end of month/year fixing flows.

As Italy mulls the coming onslaught of debt issuance in the New Year, it has to hope that today’s rather anaemic results are a symptom of trying to do an auction during the holidays. Time will tell – in the meanwhile, the auction is not particularly encouraging, though yields did fall back a bit from the highs on the day all along the Italian yield curve.

Also not particularly encouraging for EU “unionists” was an interview with a former German Constitutional Court justice with Germany’s Der Spiegel magazine who declared that the pursuit of a United States of Europe is a mistake and made other points that may reflect the court’s negative opinion on the constitutionality of the special new EU parliamentary committee agreed earlier this month.

Pound drubbing as Gilt yields droop
UK 10-year Gilts are ending the year on a high note as the yield today slipped to a record low just below the 2.00% level. That’s remarkable strength considering everything that the BoE is doing to make clear that it is more than willing to monetize even further to keep the economy afloat. Even during the height of the global financial crisis, the Gilt yield barely grazed 3.00% and now it is a full 100+ basis points lower. EUR/GBP bounced a bit intraday before retreating, but the focus over the last couple of days (for no readably apparently reason than possible fixing flows or a possible prior squeeze) was in GBP/USD, which is now suddenly poised not far above the lows for the cycle now that it has fallen approximately 300 pips in just the last two days.

Chart: GBP/USD
GBP/USD is zeroing in on an interesting area (1.5300/50) here ahead of the change to the New Year and as pessimism is so rampant on the UK domestic economy and the mainland economy as well that Gilt yields have dropped below 2.00%. Will we stay within the range in January, or is the ponderous head and shoulders formation a sign that the pair is ready to probe the old pre-2010 range well below 1.50? Our 1-year forecast for GBP/USD is 1.48.

Chart: AUD/CAD
AUD/CAD toying with the 200-day moving average again in today’s trade, though that level hasn’t proven particularly catalytic for volatility as each of the currencies has an agenda elsewhere. Downside in this pair is something we’ve been awaiting for far too long now, but it might materialize rather quickly in the New Year. Note that we have a couple of Chinese data points of interesting coming out tonight and over the coming weekend that could have a bearing on the China-sensitive Aussie. In addition, the pair tends to have a correlation, whether justified or not, with risk appetite.  Hardcore technicians might be able to sketch a messy “diamond top formation” for the pair. Stay tuned…

Looking ahead
We’ve actually got an interesting few data points to close out the year here. Look out for the US Chicago PMI out shortly today, and for the China Manufacturing PMI from HSBC, which registered a 47.7 reading in November, but a “flash” preliminary reading of 49.0 two weeks ago. Then over the weekend, we’ve got the official December PMI, which was out at 49.1, the lowest level since early 2009. On that note, please consider the Bloomberg article from overnight suggesting that Asia may be tempted to make poor policy choices in dealing with its economic slowdown next year.

I will return on January 4. In the meantime, you can add me to your twitter: @johnjhardy  if you’d like occasional intraday heads-up, mini-update, technical observations, links to just posted article from me, links to what I’m reading and the odd acerbic, attitude laden comment when the market is being particularly abusive.