Revisiting Euro’s 1.35 FX, Yields, Spreads & Dax

<p>The latest headlines from Madrid imply that a formal request for aid is inevitable. Whether it takes the form of “applying” for credit line under […]</p>

The latest headlines from Madrid imply that a formal request for aid is inevitable. Whether it takes the form of “applying” for credit line under the €500bn European Stability Mechanism (but not necessarily tapping it), or a full-fledged activation of the ESM, Spain is intending to stabilize market sentiment-without triggering the Outright Market Transactions. It’s also been said Madrid is concerned that full ESM activation may erode resources for Italy in case a request is later made by Rome.

EUR/USD continues to prove that as long as the ECB is anticipated to trigger its OMT (contingent on Spain’s inevitable formal request for help), it shall remain supported above its 200-day moving average of 1.2820s. Yet, as long as Spain remains silent, traders are unwilling to lift EUR/USD above 1.3100s.

EUR Volatility–as measured by the one-month EUR/USD call (Euro equivalent of the VIX) drifts near its lowest level since 2008. Traders’ unwillingness to buy EUR volatility ahead of a looming policy freight train from the ECB is not dissimilar from traders’ gauging of VIX ahead of the Fed’s open-ended QE.

Periphery yields are down 30% since their July highs. 10-year Spain bonds have fallen below their 200-DMA during the last three weeks, which is the longest period these yields have been below this key MA since March, one month after the LTRO 2.

Italian 10-year yields are also down 30% since their July highs, and testing key support levels holding since Oct 2010. Greek bond yields are down 40% since the POST-default/rescheduling in February.

FX and equities continue to show the most aggressive reactions to policy decisions relative to peripheral bond spreads. We stick with the $1.35 EUR/USD call by end of November made three weeks ago. A break above the 1.3180 will be required to extend fresh momentum to the next barrier at 1.3440s — the 100-WMA. 106 remains intermediate objective on EUR/JPY since the call was made on Sep 19, with the rationale of BoJ rhetorical aggressiveness towards its currency and improved sentiment in the broader EUR pairs.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.