EURUSD - Record Spanish 10y spread

Korean incident was yet another factor adding to the market worries but euro peripheries remain a major concern. After Moody’s served a blow to Ireland, it was pretty clear that the issue will not be solved this week and indeed after a short-lived recovery spreads rose once again and euro lost ground vs the dollar and yen and to some extent against the Swiss franc as well. One thing worth noticing is the 10y spread on the Spanish debt which yesterday surpassed highs recorded during the Greek phase of the crisis. While Portugal seems to be the next victim, a potential refusal of the market to cover Spanish borrowing needs would be the real-deal problem, something hard to solve by granting financing for years to come by larger EU member states. Even if it’s not going to happen, a prolonged rise in spreads is going to add to pressure on the euro.

The EURUSD nearly reached a key support of 1,3334 yesterday and it is not surprising the pair took a pause there (we highlighted the importance of this level quite a few times, including yesterday’s snapshot). While it’s a good opportunity to take a breath (especially if the Irish deliver on a promise of detailing their saving plans) odds for a retest of this level remain high. Should the level be broken, a fresh mid-term downward potential would be in place.   

Fed’s minutes show support for easing measures

Does anyone actually remember about the Fed? The Federal Reserve released minutes from the last meeting yesterday and the key points are:

-       Fed bought 65 bln USD of treasuries since Augusts’ decision to reinvest proceeds from the portfolio - this shows the scale of additional purchases on top of the announced 600 bln USD package

-       Fed underlines a weakness in a residential market and consequences for the economy – a negative wealth effect and a reduced mobility of labor – important in a context of poor October’s housing data (new home sales figures will complete the picture today)

-       Fed already lifted growth forecasts discounting impact of new measures

-       There is a general support for actions taken but some members are worries about the benefit/cost ratio of additional purchases; should the labor market data continue to improve this rift will be deeper    

A reaction was hardly noticeable but the released might have helped defend the 1,3334 on the EURUSD. Nevertheless, investors are focused on the euro zone these days and will likely remain so (at least) until the next payrolls release (that is next Friday).

Events to watch – Ifo and a range of the US data

Because of the Thanksgiving day tomorrow, Wednesday’s calendar is full of the US data. There will be a package released at 8.30 ET (14.30 CET) including claims (consensus 435k), durable orders (consensus for headline 0% m/m, core +0,6% m/m) and households’ incomes and spending (consensus respectively +0,3% and 0,4% m/m), followed by the UM index (9.55 ET, 15.55 CET, consensus 69,5 pts.) and new home sales (10.00 ET, 16.00 CET, consensus 310k). In Europe the list is topped by the German Ifo (4.00 ET, 10.00 CET, consensus 107,4 pts.) and the UK’s Q3 GDP (4.30 ET, 10.30 CET, consensus +0,8% q/q – this is a second reading).

Przemysław Kwiecień PhD, Chief Economist

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