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The failed German bond auction continues to weigh on the euro. After breaking below the 1.3420-1.3550 range, the pair consolidated in the new lower range.

Consolidation is over: the pair broke lower. European fear is also felt with a new negative record for the euro/dollar cross-currency basis swap. 2008 all over again?

EUR/USD Ranges

EUR/USD held on to support above 1.3360 at the beginning of the US session, but as the European session nears a close, this line was lost. The pair fell to 1.3325 and couldn’t recapture 1.3360 so far. The next serious support line is only at 1.3250.

The multi-month low of 1.3145, reached in October is within sight from there. Below this point, its levels seen only in January, with the year to date low of 1.2873 being highly important.

1.3360 now turns into weak resistance, followed by 1.3420 which is stronger.

This deterioration is more serious

The bond rout hit the core. German bunds were the benchmark, but now even Germany couldn’t fill its bond auction. Today, yields are going up for all European bonds together.

On a risk-on day, German yields rise, while “risk yields” such as Italian and Spanish yields drop. When fear grips the markets, German yields drop and risk ones rise – that’s when everybody wants to be in the safety of German bunds, and that’s when spreads between benchmark German bonds and others widen.

But today, yields on German bonds rose together with Italian and Spanish yields. There still is a big gap: German 10 year yields are at 2.12% while Italian yields kiss the dangerous 7% mark. Spanish yields are at 6.65%.

Another worrying sign is the new  3 year high  in 3 month euro-dollar cross-currency basis swap – the price it costs to swap euros to dollars. It reached -1.38%. When did it last hit such levels – well, the height of the financial crisis was three years ago.

The Lehman moment is getting closer. Perhaps now, Germany will allow the ECB to print money.

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