Euro Fired Up By Spain Auction amp ECB

“The greatest trick the devil has ever pulled was to convince the world he didn’t exist” – The Usual Suspects

But Draghi convinced the markets the OMT did exist in September without activating it. What ensued thereafter was a virtual easing, with peripheral bonds, equity indices and euro currency moving from strength to strength.

Euro is powered up (highest daily percentage gain since September 7, 2012) after the ECB press conference revealed that none of the governing council members called for a rate cut at today’s meeting, which added to the currency’s earlier gains triggered by a strong Spanish bond auction. €5.827 bn in 2015, 2018 and 2026 bonds was raised, exceeding expectations of €4-5 bn. Yields fell across the board, while the bid/cover ratio for the five-year auction jumped to 2.59 from the prior 2.59.

Recall the euro fell immediately after the December press conference due to downward ECB revisions in growth and inflation as well as Draghi’s indication that discussions over interest rates remained ongoing.

The ECB can continue to avoid cutting the refinancing rate to 0.25% without the OMT having been deployed would be deemed excessive accommodation from the ECB in the face of a reticent Spain.

EUR/USD’s Best Year Since 2002?

EUR/USD’s crucial accomplishment of 2012: posting nine winning months—the most since 2002 (the starting year of the euro’s bull market/beginning of US dollar’s bear market) when the single currency had 10 winning months.

The five consecutive rising months (Aug-Dec 2012) matched the uninterrupted monthly streak of Dec 2010-April 2011, Jul-Nov 2009, Aug-Dec 2004.)

Euro to Stand in the Way of Trifecta

-     The notion of a positive trifecta (US dollar, US bond yields and US equities will rise in tandem) may materialise only briefly in H2, before Eurozone markets catch up alongside EUR/USD once Greece and Italy growth hit positive territory due to the q/q calculation element and friendly market conditions in capital markets.

-     Any rebound in the US dollar resulting from hawkish FOMC minutes/commentary is likely to remain limited as the Fed has long way to go towards its 6.5% unemployment target.

Global equities will gain momentum in H2: 8150 for the Dax, 6340 for the FTSE 100 and 1540 for the S&P 500. Japan’s Nikkei 225 is seen adding to its impressive 22% rise of 2012, attaining 14,660 by Q3.