Dollar Mixed as Spain raises 4.5 bn euros in bond auction

BBH CurrencyView

• Dollar is currently mixed against the majors and EMs with Asian currencies mostly firmer against the USD
• EuroStoxx 600 drops after reaching a new 6-month high after large European bank saw its profits fall
• Czech leaves policy rate unchanged at 0.75, as expected; Romania cuts policy rate by 25bps, as expected

The dollar is currently mixed against the majors and EMs as asset markets consolidate near recent highs.  The euro ,which struggled to break 1.32 this morning following remarks from China’s premier Wen that Beijing is considering greater involvement in the EFSF and the ESM, is  trading near yesterday’s close, at 1.316.  Yet, we would argue that China has in the past made it clear it is interested in real assets and needs more clarification and transparency in regards to these vehicles.  USD/JPY continues to grind lower, down 0.08%, with a BoJ policy maker commenting that he does not think currency intervention is likely.  EUR/CHF continued to struggle around 1.2050 despite the Swiss December trade surplus dropping sharply.   

Spain raised 4.5 bn euros in a bond auction the upper end of their desired range.  Yields came in lower than prior auctions, but Spanish sovereign bonds sold off in the secondary market after the auction.  One of the main concerns at the end of last year was the ability of the euro zone sovereigns to rollover some 800 bln euros of maturing debt this year.  To date, the supply has been easily absorbed and this may have helped aid the euro recovery.  It is too early to make a judgment, but there is some fear that the buying as a result of the LTRO may have been front loaded.  In addition, as we have noted recently, February sees substantially more issuance relative to redemptions and coupon payments.  In fact, Italy’s 27 bln euro redemption and 10 bn euro coupon payment yesterday largely exhausts the month’s redemptions and coupon payments.  Yet it is noteworthy that with today’s auction, Spain has funded almost a quarter of this year’s projected needs.  Belgium and Austria have also ahead of the funding curve (~20% and 40% respectively).  Separately, France raised almost 8 bn euros in three different issues at lower yields and better bid-cover ratios.  The premium France pays over Germany for 10-year money has slipped below 115 bp for the first time this year.  In terms of price action, a hold of the 1.2980-1.3000 area increases the risks that the rally in January is extended.  A convincing break above 1.320 – 50 signals a test of 1.34-1.36.

On the data front, Australia’s December trade surplus exceeded expectations increasing to A$1.71bln in December from a revised A$1.34 bln in November (was A$1.38 bln).  The details were also stronger than expected.  In fact, considering the recent fall in commodity prices the stronger-than-expected export growth suggests that volumes of exports remained firm. That means, export growth appears to be holding up better-than-expected in spite of the slowdown in global demand. In turn, external growth (driven primarily by demand from Emerging Asia) is likely to be supportive of economic activity and should help offset the slowdown in domestic demand.  Nevertheless, we still expect the RBA to cut by 25bps at the next policy meeting on February 6, with the OIS market currently implying a 76% chance of a 25bps cut.  At the same time, we would also caution against chasing the AUD higher after having already advanced by nearly 5% year-to-date.  Although AUD remains more sensitive to external shocks, rather than domestic policy, we think it is best to wait for a consolidation in the price action before buying AUD.  We suspect the AUD is nearing the top of its recent range and would suggest that medium term investors should not chase the AUD higher as the short-covering rally appears to be losing some momentum off the back of the a slowdown in US growth and bearish fundamentals in the euro zone.  A downside break of 1.059 opens up a potential move to 1.040.  Resistance is expected near the September 2011 high of 1.0765.                   

Chinese markets outperformed the region closing nearly 2% higher, but the news flow was mixed, and even slightly contradictory. First, China’s sovereign wealth fund (Huijin Investment Co) decided to accept lower dividends from local banks it owns shares in, hence helping them build a capital buffer. Note, however, that is not the first time they do this. Still, it surely reflects growing concerns over NPLs relating to financing vehicles, the shadow banking system and property loans. Second, the government is once again signalling its intention to support small and medium size companies (SME) by extending the preferential tax policy until 2015 and creating a RMB15bn fund to support small companies. The government also reportedly asked banks to lift the NPL ratio tolerance for lending to these firms. Taken together, the implicit message here seems to be that the government is growing more concerned about the health of banks, but not so much about their lending to SMEs. We also have our concerns about the Chinese banking sector but despite the evident cracks appearing in the system, we do not think this will be a 2012 issue. As such, our view about USD/CNY remains the same. The PBoC will continue moving the fix lower (6.3075 today) and will soon break below the 6.30 lows. We see USD/CNY appreciating at a annualized rate of roughly 2% for now.