Euro Comes Off Further in Early NY

The euro continues to come under pressure and is making new lows in early North American turn over despite talk of interest from an Asian central bank.  The euro has slipped below its 200-day moving average (~$1.3130) for the first time since Sept 21.  The 50% retracement of the rally from early June through early November index comes in around $1.3080.   The euro’s decline appears to be dragging the other major currencies lower as well and hitting the appetite for emerging markets and other risk assets as well.

Investors are concerned that the Irish budget that will be voted on next week will not be approved by parliament.  Moreover, with the senior bank bond holders secure with a reaffirmed guarantee, the subordinated bank bond holders face steep haircuts.  As recently as last week 80% haircuts were being delivered and the risk is of deeper cuts going forward. 

Italian and Spanish 10-year bonds have been hit the hardest today, with yields rising 17 bp.  Portugal and Belgian bonds are under pressure too, with 10-year yields rising 11-13 bp.  Irish 10-year yields are 7 bp higher than Friday.

As the crisis becomes more acute, the shorter end of the European coupon curve is coming under stronger pressure too.  Italy’s 2-year yield is up 28 bp today, leading the charge.  Irish 2-year yields are 22 bp high.  Spain and Portugal’s 2-year yields are 13-18 bp higher.