Euro-Dollar Pair Craters

By Sam Mattera
Benzinga Guest Writer

On Thursday, the EUR/USD traded sharply lower, at one point dropping below the $1.28 mark—a level that had not been seen since September of 2010. This move comes after a better than expected jobs figure might have strengthened the dollar, while negative events in Europe may have weakened the euro.

In Europe, yields on Hungarian paper soared.

A three-year Hungarian bond auction failed when the Hungarian government rejected all bids. The failure of the bond auction prompted Hungarian CDS to rally sharply.

CDS bought on Hungarian paper could give investors protection against a default by the country, although the effectiveness of CDS instruments may have been thrown into doubt by recent events in Greece.

Although Greece was given a 50% haircut on its debt, CDS failed to protect investors from this loss. The Greek haircut was ruled “voluntary” and therefore did not trigger CDS contracts. The International Monetary Fund and European Union had been negotiating a bailout with the country to avoid a default. However, that bailout was thrown into doubt when the IMF and EU broke off the talks. The Hungarian parliament had been considering some changes to its central bank—changes that the IMF and EU opposed.

Meanwhile, in France, another bond auction struggled.

France missed its maximum target on a debt auction. Although not a complete failure, the market may have interpreted the event negatively. The yield on the Italian 10-year rose back above 7%.

Those factors may have been working to push the value of the euro down, while positive data in the US may have been pulling the dollar in the other direction.

ADP payrolls came in much better than expected, reporting in at almost double the expectations on the Street. ADP payrolls came in at 325,000 versus an estimated 175,000.

Initial jobless claims came in slightly better than expected, reporting at 372,000 against an estimated 375,000.
Given the boost in jobs, the American economy may be showing signs of further recovery.

If conditions in the Eurozone continue to weaken, while the US economy continues to improve, the currency pair could continue to trade lower.

Still, it may be hard for the US economy to thrive when Europe is weakening. US equity markets dropped on Thursday, as traders may have been pricing in a possible contagion effect.

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