Pain in Spain Sends Euro Down the Drain

No LTRO means no luck for Spain in bond auctions anymore: a fresh bond auction  hardly managed to cover the minimum predicted: only 2.59 billion euros out of a targeted 2.5 to 3.5 billion euros were covered.

In addition, yields were higher than previous similar auctions. This shows the distrust in Spain’s economy and weakens the euro.

Here are some yield numbers:

• January 2015: yield rose from 2.44% to 2.89%.
• October 2016: yield rose from 3.376% to 4.319%.
• October 2020: yield rose from 5.156% to 5.338%.

This picture is totally different from the one seen earlier in the year. Spain managed to get lower yields and  occasionally even raised more money than targeted. Spain’s fund raising was very quick, quickly reaching a third of the year’s full funding targets in a very short time.

This success wasn’t by chance: the first LTRO in December encouraged banks to buy Spanish sovereign debt, pledge it as collateral with the ECB and receive cheap loans against it.

This continued with greater force towards the second LTRO that was held on February 29th. Spanish benchmark 10 year yields were on the fall and Spain distanced itself from the other big and troubled economy: Italy.

But things changed afterwards: Spain’s updated economic figures for 2011, its downbeat predictions for 2012 and the unstoppable unemployment rate in Spain that reached a staggering 23.6% are all weighing heavily on the euro.

EUR/USD reacted badly to the news: the pair was already pressured by the hawkish FOMC minutes from the US and now confirmed the fall under 1.32 and dropped to 1.3167 at the time of writing.

More serious support appears at 1.3135, and the wide lower border of the range is at 1.30. After flirting with highs close to 1.34 last week, the pair certainly changed course, and Spain is one of the main reasons.

For more on EUR/USD, see the euro to dollar forecast.