The euro strikes back

Data/Event Risks

• EUR: Other than Spanish and Dutch industrial production, not much else due for release.
• GBP: Expect a bounce of around 0.8% in industrial production after a sharp 0.8% drop in October. If we get a figure of 0.5% or less, we might see sterling lose some further traction. Also, NEISR Q4 GDP estimate at 3pm – a decline in output could also weigh on the currency.
• USD: Trade and monthly budget figures on the docket today – neither expected to be market-moving. Bernanke speaks on Monday, two weeks before the next FOMC on January 30^th. Update:  EURO blasts through 1.3300 after Trade Numbers

Idea of the Day

Star performer amongst the majors yesterday was the euro, which benefitted from SWF buying, a good Spanish bond auction, a weak Swiss franc and continued yen selling. Draghi’s presser supressed talk of a rate cut completely, which also helped. Against the dollar, the euro started the London session near 1.3040, but climbed continually through the day and overnight reached a high of 1.3280! EUR/JPY soared to an overnight high of 118.59, a rise of 3% in just 24 hours. Since late July, the euro has appreciated by more than 25% against the Japanese currency. Against the pound, the euro is now above 0.82 and poised to register a new 9m high. Being short euros remains perilous.            

Latest FX News

• JPY: The big structural shift out of the Japanese currency into the euro continued apace yesterday and again overnight. Plenty of cannon-fodder for the yen bears last night, including a Japanese news headline urging Abe to demand that the BOJ target unemployment, and confirmation that the new Cabinet had passed a stimulus package aiming to create 600K new jobs. Abe also reiterated his hawkish disposition towards the islands dispute with China, which has been a key contributor to the weakness of the currency. We may see some profit-taking by yen shorts today ahead of the weekend after heady gains this week.
• CHF: Just for once, attracted some considerable selling interest after ZKB declared it had the right to impose negative interest rates on deposits. This follows similar pronouncements from both UBS and Credit Suisse last month. The EUR/CHF cross popped to 1.2145 in response.
• USD: Fell hard in the wake of the euro’s marked forward progress, with the dollar index back below 80. Held steady against the Aussie, and rose against the yen.
• EUR: An extraordinary performance, aided by healthy central bank demand. Falling yields in Spain ahead of what proved a strong bond auction contributed to the bullish tone. Spanish 10yr yield now below 5% – six months ago, it was above 7.5%! ECB meeting scuppered any talk of an imminent rate cut.
• GBP: For the second day running had another look at 1.60 but ran into support and then benefitted (at least against the dollar) from the euro’s surge. Still appears to have a soft underbelly, especially against the euro.
• AUD: Continues to look impregnable, climbing to 1.06 overnight, the top of the range which has been existence for the past six months.

Further reading:  European Focus Moving from Debt Crisis to Core Economies