##{"id":59313,"date":"2011-12-15T10:36:13","date_gmt":"2011-12-14T23:36:13","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/12\/15\/what-does-sub-1-30-mean\/"},"modified":"2011-12-15T10:36:13","modified_gmt":"2011-12-14T23:36:13","slug":"what-does-sub-1-30-mean","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/12\/15\/what-does-sub-1-30-mean\/","title":{"rendered":"What Does Sub 1.30 Mean?"},"content":{"rendered":"

\n\tBy Kathleen Brooks, Research Director UK EMEA<\/span>, FOREX.com<\/span><\/p>\n

\n\tWe are in full risk aversion mode. The euro is tumbling and EURUSD<\/span> is now below 1.30 while the dollar is higher across the board. The dollar index is back above 80.50 and this is weighing heavily on European stocks and commodities. Meanwhile safe havens are soaring. The UK sold GBP3bn<\/span> of 10-year debt for its lowest ever yield at 2.21%. Likewise, the 30-year German Bund<\/span> yield also tumbled to its lowest ever euro-era level. US treasuries are also attracting significant flow. Yesterday it sold 4-week bills with a yield of a big fat zero.<\/p>\n

\n\tThe break below 1.30 in EURUSD<\/span> highlights the escalation in the Eurozone<\/span> debt crisis. But where it goes from here depends on how traders digest the vast amount of commentary coming from Europe’s political classes. On balance the most important comments (i.e<\/span>., the ones that come from Germany) are negative. Firstly, Merkel ruled out a swift solution to the debt crisis when she addressed the Bundestag<\/span> earlier. She said it will take years to solve, however she said it was possible to overcome, but it will take patience – which is something the markets have run out of.<\/p>\n

\n\tAdded to this, the head of the Bundesbank<\/span> Jens Weidmann<\/span> said that he wasn’t a fan of the ECB’s<\/span> SMP<\/span> programme<\/span> and that the governing council is growing sceptical<\/span> about the effectiveness of these bond purchases. However, the ECB<\/span> has scaled back on purchases so no wonder its effects have been minimal. As we have said before, the ECB<\/span> needs to be the lender of last resort for Europe’s peripheral nations to see their yields fall. Unless the central bank is there to back-stop members’ debts then these debts can never be considered risk free. This is a major concern for the markets, but Weidmann<\/span> and co. seem to disagree, and have effectively laid to rest the prospect of the ECB<\/span> printing money any time soon.<\/p>\n

\n\tHowever, the Bank may have to reverse its position if we see 1, a failed Italian bond auction or 2, a bank collapse. The prospect of a Lehman-like event in Europe has definitely fallen since the coordinated central bank action from earlier this month, however banks are still nervous and are choosing to deposit funds with the ECB<\/span> rather than lend to their peers in the industry. We mentioned earlier that not only are deposits at the EBC<\/span> increasing but more banks are having to borrow from the ECB<\/span>. This is acute for French banks who have seen their borrowing from the ECB<\/span> jump to EUR87bn<\/span> inn November from EUR37.4bn<\/span> in October.<\/p>\n

\n\tAlthough German banks have borrowed less from the ECB<\/span> in recent weeks, Berlin still decided to re-activate its bank rescue fund today as the Eurozone<\/span> crisis increasingly makes it less likely that banks in the currency bloc will be able to meet strict capital requirements set by the European Banking Authority for mid-2012. The German fund will be EU 360bn<\/span>, and an official said that it currently remains un-tapped. This move comes after Commerzbank<\/span> shares fell sharply yesterday after it said it may need national help to the tune of EUR 5.3bn<\/span>.<\/p>\n

\n\tSo strains remain and as we head towards the end of the year there is a triple whammy of fears on investors’ mind: a failed Italian bond auction in Q1, a collapse of a bank and 3, sovereign downgrades.<\/p>\n

\n\tThus, comments from officials like Weidmann<\/span>, who also added that some EU states can live with high yields and rising borrowing costs can bring greater fiscal discipline, are weakening the sentiment of the bulls, but are feeding bearish feeling in asset markets.<\/p>\n

\n\tDebt auctions earlier saw Italy pay 6.57% for 5-year debt (unsustainable in the long-term). Tomorrow we have another Spanish auction to round off the week. Spain’s yields have come off today and the 10-year yield is currently around 5.65%, however this may be due to central bank buying – ironically.<\/p>\n

\n\tThe rot is spreading to Eastern Europe. Fitch said that downside risks are increasing for central Europe’s banking sector due to weak growth and worsening asset quality as bad debts start to rise.<\/p>\n

\n\tIn the UK it was the last Prime Minister’s questions of the year today. This time Nick Clegg was by the Prime Minister’s side. Cameron stood firm on criticism for using his veto in Europe saying that he “makes no apology for standing up for Britain” in Brussels last week. This hasn’t stopped safe haven flow into UK Gilts<\/span>, and the pound remains strong against the euro.<\/p>\n

\n\tWe need a daily close sub 1.30 to see a sustained move lower to the 1.2860 support zone – the 100% retracement<\/span> of the 1.4940 high from early May. The drop in the euro is also hurting the Aussie, considered the riskier end of the FX spectrum. It is sub- parity with the dollar and the next support level of note is 0.9870.<\/p>\n

\n\tOPEC has also added to the political risk today. The oil producers’ cartel said that it would limit production in the first six months of next year to 30 million barrels per day. However, that hasn’t been enough to halt the decline in oil, Brent has fallen below $107 today as we await European economic data tomorrow, which is expected to show further decline in growth this month.<\/p>\n

\n\tOverall, a pivotal day for the euro as political risk goes into overdrive.<\/p>\n

\n\tThis chart (from Bloomberg and the ECB<\/span>) shows French banks’ borrowing from the ECB<\/span> has risen sharply in recent weeks. (EUR billions).<\/p>\n

\n\t $\"\"$ <\/p>\n

\n\tThe views expressed are the author's, not FNArena's<\/span> (see our disclaimer).<\/p>\n

\n\tDisclaimer:<\/strong> The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD<\/span> contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. ??<\/em><\/p>\n

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\n\tTechnical limitations<\/strong><\/p>\n

\n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise<\/span><\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n

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