European currency markets are range bound with investors weighing up decent European data and mixed economic news, along with the prospect of key, market moving developments tomorrow including sovereign issues by Italy and Spain and an ECB rate announcement. The EUR is being held captive by market offers in the early 1.28’s and bids in the 1.2730’s. So far January is in danger of recording the slowest opening period for currency volatility for a New Year on record!
Germany auctioned +EUR4b of five-year debt earlier this morning while Spain and Italy will offer as much as +EUR17b in the remainder of the week. The new 2/2017’s OBL auction received solid bidding. A total of +EUR9b bids were received, well above the average of +EUR6.8b at the last three-issues. The resulting cover of 2.84 times is thus about twice the average an is the strongest in eight years. It’s no wonder we saw negative German bill yields earlier in the week! It seems that the market does not believe in an ECB rate move Thursday after last months launching of various new policy measures. The central bank is expected to stay on hold until March with no new announcements on ECB bond buying. Draghi and company are only expected to launch QE when there are “clear signs of deflation risk.”
Germany’s economy grew in line with expectations last year, as robust domestic consumption and exports offset the “affect of the Euro-zones ongoing debt crisis.” Despite finishing out the last quarter with a weak close, contracting a supposedly -0.25%, the Euro-zone’s largest economy grew +3% in price adjusted terms in 2011, following growth of +3.7% in 2010 and a -5.1% contraction in 2009. Germany is no “Atlas,” the Euro-zone remains in danger of heading into a mild recession.
In North America, the markets will shift their focus to the details of the Fed Beige Book and on speeches by Atlanta Fed President Lockhart (voter) and Philadelphia Fed President Plosser. So far this week Fed speakers, Williams and Pianalto, have given the impression that further QE operations are possible if US data turns softer again and that there is little inclination to even consider tightening among the committee despite the recent improvement in data. Lack of movement this week has been a tough pill to swallow, however, investors remain in the game.
Bunds and Treasury Yields Narrow
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