New Year Rally halts as Eurozone bought back to reality

Tom Tong05/Jan/2012Currency Updates

GBP

Yesterday saw Sterling hit its highest point in over a year versus a broadly weaker Euro as many investors were largely concerned by Euro zones sovereign funding requirements and likely recession, this meant that many were seeking to diversify funds out of the single currency in favour of perceived safer alternatives. Although Wednesday saw Germany acquire an adequate demand at an auction of 10-year government bonds it did little to reinstate investors faith as the real test will come when Italy and Spain issue bonds next week.

On the flip side of things Sterling was seen depreciating against the Dollar as although investors seem to prefer the Pound against the Euro, Britain is still showing signs that it may fall back into recession later this year. Traders have suggested that there has been strong interest to sell the British currency for its American counterpart this can be attributed to the fact that although the UK government is trying to stay the course of drastic austerity measures to maintain its prized AAA credit rating, another run of sluggish figures has made investors more pessimistic about the economy.

EUR

The new year rally of the Euro showed signs of exhaustion as the eurozone faced renewed concerns over debt problems; these problems have overshadowed recent optimism on the global economic outlook. The Euro fell to a 15-month low against Sterling. Data revealed that borrowing by banks via the ECB’s marginal lending facility remained high; ECB’s overnight facility rose to €453.2bn, the highest since 1999. This borrowing has highlighted the fact that banks are in fact looking to use this overnight facility to get in early on the € 230bn of bank bonds that are maturing in the first quarter of this year; this is in contrast to the ECB’s hope for this facility to be used by banks in order to buy high-yielding peripheral (a sovereign debt carry trade).

Spanish government bonds and credit default swaps also came under pressure yesterday after reports emerged that the government was considering applying to the EU’s rescue fund and the IMF for aid. Yield on Spain’s 10-year debt rose 15bp, and the sovereign five-year credit default swap spread widened by 37bp.

Whilst yesterday saw a relatively successful auction for German 10-year bonds, worries remain over France’s debt auction today which is hoped will raise up €8bn in 10-30 year debt. Concern about European government debt is expected to dominate headlines for the rest of the week ahead of debt talks on Friday between Italian Prime Minister Mario Monti and French President Nicholas Sarkozy.

USD

The Dollar rebounded yesterday as the Euro came under renewed pressure as concerns about the Euro-zone debt crisis re-emerged. The Dollar advanced against three of the four component currencies.

With key economic data being released in the US tomorrow we could see moves in the Dollar as the market reacts to this news. As domestic data continues to improve traders will be putting more emphasis on the Fed’s language after yesterdays minutes revealed the committee now looks to release individual forecasts on interest rates in an effort to provide further transparency to the market. The general consensus is the Dollar will remain relatively docile as we head into Fridays key non-farm payrolls.

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Written by Tom Tong

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