EUR Bulls Covet This Squeeze

It seems that some of the global cash “hoarding” has been given the go ahead to be put to work, temporarily at least. Risk appreciation is again in vogue. The single European currency has experienced little form of retreat outright this week, now that China, perception wise at least, seems to be capable of avoiding an economic hard landing.

With the IMF fund euphoria announcement beginning to fade-both US and Canada are showing their reluctance to the increased lending plan-investors have managed to shift their focus back to the remaining Spanish and French auctions this morning. The Mexican standoff between Greece and its creditors seems to be diffusing and the negotiations to avoid a default were being bought back to life, helping the Euro sovereign debt yield situation as well. The market it seems has been dealt a positive weekend deadline by the credit negotiators.

After Spain halved its borrowing costs at a bill auction earlier this week, another strong auction was expected, especially after he ECB having been capable of pumping +EUR489b of three-year money back into the system improving liquidity just before the New Year. The Spanish Treasury has cleverly front loaded their 2012 issuance, knowing that their banks have room to expand their balance sheets. This morning, Spain sold a total +EUR6.6b bonds, nearly twice the +EUR3.5b target, as demand for its paper again proved strong. Most notably, there was a strong bid-to-cover ratio for 10-year product, increasing to 2.2 versus 1.5 in the previous period.

Again, strong perception has the EUR testing the depth of another new handle. The currency got a jolt after auction results and managed to trip some stop losses above 1.29. This area, first time around at least, was congested with some short term long positions and good Asian selling interest. Currently, the EUR is contained by 1.2875 option expiries and a 21-MDA. The bull technical analysts would be much happier with a close north of the new handle. This is very doable, now that the stop-losses are again piling up above the figure.

In the overnight news, the disappointing jobs number out of Australia (-29.3k vs. +10k expected) has increased the probability that the RBA will cut its cash rate another-25bps to +4% at next months monetary policy meeting. This morning, the Aussie has a busy option expiry schedule around the 1.0405-10 and 20 levels. It seems that the long yen positions are to watch out. Is the USD/JPY downtrend near an end? Japans MoF capital flow data release may be suggesting this. The appetite for Japanese assets seems to be waning and along with slowing currency repatriation flows would suggest that the argument to want to hold yen was weakening, unlike that of the EUR which seems to be chomping at the bit to antagonize the ‘bears.’

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