Intraday Market Thoughts

EUR/JPY Falls to 10-Year Low in Risk Rout, Italian Auctions in Focus

by Ashraf Laidi
Dec 29, 2011 2:36

Risk trades deteriorated in early US trading on Wednesda, sending EUR/JPY to its lowest level in 10 years. USD was the top performer while GBP lagged. The Asia-Pacific schedule is quiet.

As US traders came to their desks, the GBP began to fall sharply. It was quickly followed by the euro and, later, the broad risk trade. Low liquidity exaggerated the moves, which were driven by a number of reasons : 1) Concerns about a growing ECB balance sheet after weekly data was released 2) A rise in overnight ECB deposits, suggesting banks are unwilling to lend to one another 3) rumors of European sovereign downgrades 4) worries about the Italian auction

None of these reasons stand up particularly well to scrutiny. Flows, year-end settlement and possible hedge fund closures/redemptions were more likely culprits.

No major US economic data was released in the session but various metrics on the US holiday shopping season suggested a 3-5% y/y improvement. We caution that it is still early for drawing conclusions.

Oil fell back below $100 after climbing earlier on the growing war of words between Iran and the US regarding the Strait of Hormuz. US naval commanders said a closure of the Strait will not be tolerated.

Perhaps the most significant move was a brief fall in EUR/JPY below the October low of 1.0075 to a fresh 10-year low. A more sustained break would be deal a significant technical blow.

Other large moves came in gold (-2.7%) silver (-6%) and the S&P 500 (-1.3%) as it fell into negative territory on the year.

With no data scheduled for the Asia-Pacific session, the focus will sharpen on a series of longer-dated Italian debt auctions in the day ahead. Yields at short-term bill auctions on Wednesday were roughly half of what they were a month ago. This helped to pull down longer-dated yields in early trading but after the sharp euro selloff, 10-year rates climbed back to nearly unchanged at 7%.

The market doesnt appear to be betting on a large improvement partly because of persistent signs of year-end cash hoarding. Even if yields improve in the sale, it may be risky to buy EUR given illiquid markets and unpredictable flows.

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