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Quotes from Nordea Markets: -German bond yields headed higher yesterday, with the 10-year yield rising by 3bp. The US bond market was more resilient and the 10-year yield ended the day close to unchanged. Core bonds yields are likely to reverse yesterday’s increases today, as geopolitical worries persist and equity market sentiment has become more wobbly. -Intra-Euro-zone spreads widened again, with large moves seen in Portuguese and Greek yields, the latter jumping by 25bp in the 10-year sector. The long rally in peripheral bonds has raised an increasing number of questions about how long the gains can continue. In short, even though more volatility will be in store going forward, the rally has probably not run its course yet. |
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Source: FxWire Pro
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market sentiment
WORLD FOREX: Euro Gains Amid Expectations for ECB Easing
By Tatsuo Ito
TOKYO–The euro gained against the dollar and the yen in Asia Wednesday as investors tiptoed back into the single currency amid expectations that the European Central Bank will take fresh easing action later in the day to calm market jitters.
With signs that global economic growth is being slowed by the European debt crisis, traders are looking at a possible wave of new easing measures by global central banks as a cue to position themselves for improving risk sentiment.
“Regardless of whether the ECB acts or not, expectations for further easing action have been fairly strong, prompting traders to unwind euro shorts,” said Kuniyuki Hirai, manager of the foreign exchange trading department at Bank of Tokyo-Mitsubishi UFJ.
“The ball is now in the central banks’ court,” he said.
The ECB’s rate-setting meeting, scheduled to take place later Wednesday, comes after the Reserve Bank of Australia on Tuesday decided to cut its key interest rate by 25 basis points. The Bank of Japan and the U.S. Federal Reserve will hold their policy meetings later in the month.
At 0450 GMT the euro was $1.2505 compared with $1.2452 late Tuesday in New York, according to EBS via CQG. Against the yen, it was at Y98.69 from Y98.06.
Mr. Hirai said that the euro could spike to $1.2550 if the ECB resumes its government bond purchase program or launches another round in its long-term refinancing operation, but he added that a sustained rally is doubtful.
Some analysts think the ECB could cut rates in a bid to help stabilize market sentiment.
“We are looking for at least a 25-basis-point cut,” said Christopher Vecchio, currency Analyst at DailyFX.
“But if the ECB chooses to sit on its hands again, it will be a very poor day for risk-correlated assets, and the euro could slip to fresh 2012 lows near $1.20.”
Meanwhile, the dollar maintained its firm note against the yen after the U.S. currency jumped in New York Tuesday following comments from Japanese finance minister Jun Azumi in the wake of a Group of Seven teleconference.
Junya Tanase, chief currency strategist at JPMorgan in Tokyo, said that Mr. Azumi’s comments about the yen and excess volatility in currency markets were “well-timed” since they came out when the market was stable and participants were looking for cues to push the dollar higher amid a rise in U.S. market interest rates.
The dollar was at Y78.93 from Y78.75 and was at CHF0.9607 from CHF0.9646, while the U.K. pound was at $1.5426 from $1.5377. The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 82.527 from 82.767.
Interbank Foreign Exchange Rates At 00:50 EST / 0450 GMT
Latest Previous %Chg Daily Daily %Chg
2150 GMT High Low 12/31
Dollar Rates
USD/JPY Japan 78.92-96 78.73-77 +0.24 78.95 78.62 +2.63
EUR/USD Euro 1.2504-08 1.2451-54 +0.43 1.2516 1.2442 -3.50
GBP/USD U.K. 1.5423-28 1.5381-85 +0.28 1.5433 1.5374 -0.75
USD/CHF Switzerland 0.9604-08 0.9643-47 -0.40 0.9653 0.9598 +2.49
USD/CAD Canada 1.0331-36 1.0375-80 -0.42 1.0384 1.0332 +1.21
AUD/USD Australia 0.9852-56 0.9740-44 +1.14 0.9862 0.9738 -3.47
NZD/USD New Zealand 0.7623-26 0.7559-65 +0.83 0.7630 0.7562 -1.95
Euro Rate
EUR/JPY Japan 98.69-74 98.03-08 +0.67 98.78 97.94 -0.85
Source: ICAP PLC
Write to Tatsuo Ito, +813-6269-2780; tatsuo.ito@dowjones.com
Global FX & Fixed Income News
SNAPSHOT:
-Dollar stable; Treasurys boosted by flight to safety; stocks called sharply lower; ICE June Brent down 56 cents at $118.20, Nymex June crude down 61 cents at $103.27; spot gold down $9.62 at $1,632.70.
-Watch for: Earnings from ConocoPhilips, DR Horton, Netflix, Texas Instruments, Xerox
-Top News: Euro-Zone Debt Crisis Spreads To Core; Euro-Zone Data Show Recession Still; German Manufacturing Hits Near 3 Year Low
MARKETS OUTLOOK: FOREX:
Market sentiment remains rattled by a run of disappointing European PMIs-particularly Germany’s-and the weekend’s political developments in France and the Netherlands. However, in the absence of any fresh negative headlines EUR/USD stabilized close to 1.3150, USD/JPY stopped falling and peripheral euro-zone bond yields were off session highs with the Spanish 10-year yield back below 6%.
BONDS:
U.S. Treasurys were boosted by euro-zone jitters as the debt crisis threatens to spread to the core of the currency area, with French and Dutch bonds under pressure following the first round of French presidential elections and the collapse of budget talks in the Netherlands. Spanish and Italian yields also rose and the resulting flight to safety has given Treasurys a boost. Focus is now likely to turn firmly to the FOMC meeting later in the week. At 0408 ET, June Treasurys were up at 132.010 and the 10-year cash yield was 1.93%.
The cost of insuring European debt against default rose Monday after fresh political concerns and downbeat economic data cast further uncertainty over the euro zone.
At around 0500 ET, the SovX Western Europe index, which investors can use to buy or sell credit default swaps on a basket of 15 sovereign borrowers, was two basis points wider at 282/287 basis points, according to data-provider Markit. The iTraxx Europe index, which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was five basis points wider at 148/149 basis points. The Crossover index of 40 mostly sub-investment-grade European corporate borrowers was 17 basis points wider at 689/692 basis points.
EQUITIES:
U.S. stock futures are sharply lower, tracking losses in European markets amid political uncertainty in France and the Netherlands, together with downbeat euro-zone PMI data. In France, uncertainties over the outcome of presidential elections added pressure, while in the Netherlands, the failure of current budget talks has put the country’s triple-A rating at risk. Furthermore, the euro-zone composite PMI survey fell to 47.4 from 49.1 in March, weighed by a steep decline in the manufacturing sector. The data paint a grim picture of the region, prompting further worries about global growth.
“With no major data expected out of the U.S., today’s initial slide may set the tone for a day of cautious, back-and-forth trading as investors digest these European developments and weigh up what impact they will have on an already shaky recovery for the eurozone,” said Rupert Osborne, Futures Dealer at IG Index.
COMMODITIES:
Weak market fundamentals are likely to place downward pressure on oil prices over the next few months, said Torbjorn Kjus, oil-markets analyst at DnB NOR. Still, ongoing conflicts in South Sudan, Yemen and Syria will offset weak demand, he said. And “any reaction to macro data out of Europe is likely to be short-lived as Europe looks weak for the next few years.”
Gold market volatility is likely to pick up as traders await comments from the Federal Reserve’s April meeting, said Andrey Kryuchenkov, analyst at VTB Capital. “Market participants [are] keenly awaiting the FOMC’s comments about the ongoing U.S. economic recovery…looking for hints on its future monetary policy,” he said. He noted that resistance is at $1,680-$1,690 on a break above $1,655, while the market is well supported at $1,630 with key support at $1,600-$1,610.
=======TODAY'S CALENDAR=======
ET PERIOD
0830 CAN Feb Wholesale trade
N/A US Chicago Fed's Financial Literacy
& Education Summit
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TOP STORIES OF THE DAY:
Dutch, French Politics Rumble Markets
Markets show the strain after a run of unsettling political news over the weekend, raising fears over the commitment of core euro-zone countries to fiscal discipline.
Euro-Zone Debt Crisis Spreads To Core
Political fears hit euro-zone bond markets with French bond yields climbing on concerns of a possible Socialist victory in the race for president and Dutch bonds hit after deficit talks collapse.
Euro-Zone Data Show Recession Still Biting
The euro zone’s private sector contracts in April at the sharpest pace since November, weighed down by a steep decline in the manufacturing sector.
German Manufacturing Hits Near 3 Year Low
Germany’s private sector expands at a slower pace in April, weighed down by the steepest contraction in the manufacturing sector since July 2009.
Dutch Talks Collapse, Imperiling Cuts
Talks over measures to slash the Dutch government’s budget deficit collapse after seven weeks of negotiations.
Sarkozy Behind In Race For Presidency
Nicolas Sarkozy finds himself in a fight for his political survival, after finishing behind his Socialist rival in the first round of France’s presidential election.
French Business Sentiment Drops Sharply
French business sentiment drops sharply in April and is lower than economists’ forecasts.
Spain’s Economy Contracts In 1Q
Spain’s economy contracts 0.4%, evidencing that a worsening downturn is making it tougher for Madrid to reach its austerity targets.
Eurostat Warns Of Higher Irish Deficit
The European Union’s statistics institute confirms the 2011 budget-deficit estimates of most European countries, and warns Ireland’s is seen much higher.
Bundesbank Against Direct Rescue-Fund Aid
Bundesbank rejects IMF’s proposal to help troubled banks directly via the European rescue fund if needed.
French Business Activity At Six Month Low
French business activity is at its weakest for six months in April, surveys show.
G-20 Doubles IMF Lending Base
G-20 leaders say they will roughly double the IMF’s lending base by injecting more than $430 billion into the world’s last-chance bank.
Greece’s Big Banks Post Record Losses
Greece’s big four banks, which together control about 80% of the Greek banking system’s assets, post record 4Q losses of more than EUR24 billion.
Hungary Mulls Further Changes To Bank Laws
Hungary may still make further changes to its central bank laws once talks take place between the government and the European Commission.
China PMI Still In Contractionary Range
An initial measure of China’s manufacturing activity shows fresh signs of strength in April, but the data indicate the economy is still sluggish.
Australia PPI Fall Boosts Case For Rate Cut
Australian wholesale prices record their biggest quarterly fall since late 2009 in the first quarter of 2012, increasing bets that the RBA will cut rates next week.
PBOC Says Can Manage Risk From Widened Band
China’s central bank has a number of tools to manage its exchange rate and the risks from the yuan’s newly widened trading band are manageable.
Overnight Trading Error Hit Swiss Franc Vs. Dollar
The dollar briefly traded at around 100 times its value against the Swiss franc overnight, after an erroneous price pushed the greenback to CHF90.00, from around the CHF0.90 level, EBS confirms.
WSJ: MF Customers Press JP Morgan For Funds
Customers of MF Global Holdings Ltd. are pushing regulators to get tougher on J.P. Morgan Chase & Co. (JPM) about money that went missing from accounts just before the firm’s collapse.
Philippines To Raise China Dispute With US
The Philippines said Monday it would officially take its concerns over an increasingly tense territorial dispute with China to the U.S., its key military ally.
China Says It Opposes Any US Arms Sales To Taiwan
China on Monday repeated its opposition to arms sales to Taiwan, following a media report that Taipei plans to buy four warships from the U.S. to modernize its aging fleet.
-By Paul Larkins, Dow Jones Newswires; 4420-7842-9319; paul.larkins@dowjones.com
FOREX FOCUS: A Chinese Medicine For Frazzled Markets – by pessimist, doom seller and antieuropeist Nicholas Hastings
By Nicholas Hastings
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)–When Chinese Premier Wen Jiabao announced last week that growth this year would be less than expected, a shiver ran down the spine of financial markets.
Strong Chinese growth remains vital to the global recovery as there is still little to take its place.
The U.S. economy may be getting better but Japan continues to struggle, the euro zone could be slipping into a double dip recession and even the U.K. appears to be stumbling, according to new data showing a surprising slump in industrial production.
Hopes that more emerging markets might take up some of the slack as China slowed is also proving rather disappointing. Take one look at the recent growth data from Brazil, which has been forced into slashing interest rates to help the economy.
So it is still all eyes on China as a prime engine for the global recovery.
And why any suggestion that China might be heading for a hard landing sends financial markets into a panic.
But early Friday, while the world was watching to see if Greece would be able to complete the largest sovereign bail out in history, Beijing released data that should go a long way to improving market sentiment.
It announced that Chinese inflation fell to 3.2% last month from 4.5% in January. Some fall had been expected, as the impact of a surge in food prices fell out. However, the data also showed that non-food price inflation had eased. ING Financial Markets said that Chinese inflation for the year as a whole should now be down at 3.0% from its previous estimate of 3.5%.
This optimism that price pressures are falling was reinforced by other data showing that producer prices were flat in February, after rising by 0.7% in January.
All this means that Beijing can now concentrate on boosting growth rather than worrying that inflation is getting out of hand.
There is already rising speculation that China will cut the level of reserve requirements for banks to help stimulate borrowing.
Other data this week showing that growth in retail sales and industrial production had continued in the early months of this year certainly suggests that further monetary easing is needed.
Of course, Beijing may still feel hampered in easing policy too much as it tries to keep a restraining hand on the country’s booming house market.
But with inflation now under control, and likely to stay that way for now, China is in a much better position to react to any downside risks to economic growth much more promptly.
For a world economy that still remains very much on a knife edge, this can only be good news.
And for financial markets, it should prove another reason to calm down.
Bloomberg TNI FRX POV
Reuters USD/DJ
Thomson P/1066 or P/1074
(Nicholas Hastings is a Senior Correspondent in London for Dow Jones Newswires who has written about foreign exchange for more than 20 years. He previously covered a variety of markets, including equities, fixed income, commodities and energy. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com or on twitter @NickHastingsDJ)
ECB’s Praet: ECB May Forgo Profits On Greek Govt Bonds – Report
DOW JONES NEWSWIRES
AMSTERDAM (Dow Jones)–The European Central Bank may indirectly help Greece’s debt-relief operation by forgoing the profits it makes on its holdings of Greek government bonds, one of the ECB’s executive-board members said in an interview to be published Saturday.
“We are making a profit on a part of our portfolio of government bonds. These profits will flow back to the national central banks and to their owners, the member states of the euro zone. They are free to decide what they want to do with that money,” Peter Praet said in an interview with Belgian newspaper De Tijd.
Praet, who is also the ECB’s chief economist, said that the ECB can’t participate in a Greek debt restructuring and that “we cannot finance governments through purchasing their debt.”
Turning to the situation in Greece, Praet said that terms of the country’s bailout package are feasible but that they require the support of the Greek population. “Support of the people and its political representatives is crucial. Greece has to implement reforms for its own sake. A lack of implementation also creates uncertainty that can affect other member states,” he was quoted as saying.
Praet said that the first round of the ECB’s long-term refinancing operation, or LTRO, in which banks snapped up EUR489 billion of cheap loans, avoided an outright credit crisis in Europe and that it helped to restore some confidence in financial markets.
“Market sentiment is positive after our move,” he said. “But it doesn’t only have to do with the ECB. Many people forget that countries like Italy and Spain have announced tough reforms in the meantime. Banks are making plans to recapitalize.”
Praet said ECB’s LTRO is an exceptional–and temporary–measure. “It’s not here forever, ” he said.
-By Maarten van Tartwijk and Archibald Preuschat; Dow Jones Newswires; 31-20-5715-201; amsterdam@dowjones.com
FOREX FOCUS: Dollar Bears Need To Look At The Wood (anti-europeist rant. Was before Greek deal)
By Nicholas Hastings
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)–Dollar bears are having difficulty seeing the wood for the trees.
For most of this year, hopes that the euro-zone debt crisis will be resolved and suggestions that a global recession will be avoided have helped to lift market sentiment and push the U.S. currency lower.
Not only has the dollar fallen against other major currencies, such as the euro and the yen, but its index has fallen from a high of over 81.5 in early January to under 78.5 now.
This dollar decline, however, should all start to change.
At the moment, Greek negotiations for its second bailout are dominating market sentiment as the talks lurch from one crisis to the next.
However, any euphoria over a settlement that allows the country to get the next tranche of funds from the European Union, the International Monetary Fund and the European Central Bank and avoid any immediate default will be short-lived.
Any further tranches beyond that will probably be linked to proof that Greece is adopting the austerity measures it has agreed in a political climate that is likely to remain highly charged as the country’s current technocratic leader Lucas Papademos is forced to hold elections in the next few months.
In other words, as Michael Derks from FxPro Financial Services, puts it: “the country continues to live hand to mouth from the EU/IMF bowl.”
But, even if Greece is no longer seen as a major issue for the euro, other peripheral debtors soon will be.
The 10-year borrowing costs of Portugal, Italy and Spain may have fallen back to 13.06%, 5.59% and 5.27% respectively in recent weeks, but each of these countries continue to pose a risk to the euro in coming months.
The decline in yields has been helped by the support provided by European banks recycling cheap funds from the ECB late last year.
The ECB is expected to provide another massive liquidity injection later this month but the success of this exercise can’t be taken for granted given the increased pressure on European banks to raise their capital ratios.
Deteriorating growth prospects in the euro zone and a continued reluctance by the ECB to ease monetary policy any further just now are also likely to start playing into euro weakness as investors refocus back on fundamentals that are likely to keep the financing costs of peripheral debtors under pressure.
Growth in a global sense could also disappoint.
Recent optimism about the world economy is likely to appear overdone as central banks fail to ease policy as quickly as expected.
This week the Reserve Bank of Australia chose to leave its rates unchanged, rather than cut them by 25 basis points as forecast, and hopes for an early reduction in China bank reserve requirements have receded as the country’s inflation pressures are proving more stubborn than expected.
So, where does this leave the dollar?
It should increasingly be seen as the currency of the one country that does seem to be one step ahead.
U.S. growth continues to improve with even the White House talking about an unemployment rate down at 8% by the end of this year, rather than the 8.3% recorded last month.
By promising to keep policy easy until late 2014, the Federal Reserve has also boosted confidence that it remains on standby to inject more liquidity if needed to preserve the economic recovery.
Given the uncertainty over the euro zone, the concern over China and the riding need for both Japan and Switzerland to curb any strength in the yen and the franc, both seen as alternative safe haven currencies, the dollar should find itself increasingly in favor.
Perhaps signs of this are already emerging in U.S. Treasurys. where a sale of 10-year bonds this week attracted the highest amount of bids since last August.
Bloomberg TNI FRX POV
Reuters USD/DJ
Thomson P/1066 or P/1074
(Nicholas Hastings is a Senior Correspondent in London for Dow Jones Newswires who has written about foreign exchange for more than 20 years. He previously covered a variety of markets, including equities, fixed income, commodities and energy. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com or on twitter @NickHastingsDJ)
Italy 10-year bond yields fall, confidence grows
MILAN, Jan 30(Reuters) – Italy’s longer-term borrowing costs fell to just above 6 percent on Monday, their lowest since October, indicating growing investor confidence the government can tackle a daunting refinancing challenge in the next few months. Although foreign investors are still largely reluctant to take up longer-term Italian bonds, the country’s banks have stepped up purchases of domestic debt largely thanks to the European Central Bank’s disbursement of cheap, three-year loans. Ten-year yields fell by nearly one percentage point at Monday’s 7.5 billion euro ($9.85 billion) sale, offering evidence that the ECB liquidity boost is spreading to longer maturities after powering a rally at the short end of the curve.
“Foreign exposure has been cut significantly since Italy has come under pressure last summer,” RIA Capital Markets bond strategist Nick Stamenkovic said. “I think domestic investors have taken the largest part with maybe some appetite from overseasinvestors.”
Analysts said demand could have been stronger when taking into account the nearly 36 billion euros in bond redemptions and coupon payments due on the auction’s settlement date.
“We expected a better show on the demand sidebecause of the coupon and redemption payments in the week, if you take that aside it was an OK auction,” said Achilleas Georgolopoulos, a strategist at Lloyds Bank in London.
“We know now that all of the new auctions will be OK.”
Italian10-year bonds came under pressure in the market before the auction but stabilised afterwards. Yields last stood at 6.12 percent, up 20 basis points on the day, after breaking below 6 percent last week following strong Italian short-term debt sales.
Traders said the fall in Italian yields was supporting market sentiment, putting an end to sales from abroad.
With some 90 billion euros of bonds maturing between February and April, Italy’s refinancing task seemed almost unmanageable lastNovember, when its yields soared to euro lifetime records highs of nearly 8 percent.
EURO ZONE RISK
That forced a change of government and new Prime Minister Mario Monti has since been striving to regain market confidence. He hasengaged the country in broad-ranging austerity and reform efforts to try to keep the world’s fourth-largest debt pile under control.
Considered a proxy for euro zone risk with its 1.9 trillion euro debt, Italy is vulnerable to any worsening ofthe debt crisis in the area.
“This can last as long as the ECB is providing funding,” Stamenkovic said.
With a new three-year ECB tender scheduled in February, analysts see continued domestic demand for government debt that can be used ascollateral to borrow cheaply from the central bank.
“The larger Italian banks have already done their share, we see demand coming now mainly from several smaller Italian lenders or savings banks,” a trader at one primary dealer said asking notto be named.
Monday’s sale came after Fitch Ratings cut Italy’s debt rating by two notches late on Friday to ‘A-‘. It also downgraded four other members of the single currency bloc.
The Treasury, which missed only slightly the top of its targeted range of up to 8 billion euros, paid 6.08 percent to sell 10-year paper on Monday — down from 6.98 percent a month ago.
By comparison, Spain paid 5.4 percent earlier this month on new 10-year debt, down from nearly 7 percent inNovember. Madrid’s much lower funding needs have helped Spain benefit more from the ECB-driven rally.
However, demand for Italy’s 10-year benchmark totalled 1.4 times the offered amount, above last year’s average bid-to-cover ratio for thisbond.
The sale of a new five-year bond saw weaker demand but yields fell sharply anyway. At 5.4 percent, the five-year auction yield was more than a full percentage point below a euro lifetime high of 6.5 percent Italy paid in mid-December. ($1 = 0.7615 euros)
(Additional reporting by London government bond desk; Editing by Elizabeth Piper) Messaging: valentina.za@thomsonreuters.com)
FOREX FOCUS: Japanese Intervention Alert Louder Than Ever – by Nicholas Hastings
By Nicholas Hastings
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)–Bank of Japan intervention alerts should be switched on again.
If anything, they should be turned on even louder than before.
For a few weeks there, the need for intervention subsided. The yen had fallen back, much to the relief of Japanese authorities as the global risk environment improved and the currency lost some of its safe haven attraction.
However, everything has swung back again in the yen’s favor in the last few days.
It all kicked off when the U.S. Federal Reserve gave its dovish assessment for the U.S. rate outlook, suggesting that monetary tightening would be delayed until late 2014. The market had been looking for rates to start rising again in 2013.
Speculation that the Fed might still resort to further monetary easing has only increased since last Friday’s news that annualized gross domestic product growth in the fourth quarter of last year amounted to only 2.8% rather than the 3.0% that had been expected.
Fears are that growth in the first quarter of this year will now be even slower if companies start to run down the inventories they built at the end of last year. That contributed as much as 1.9% of the growth figure.
As a result first quarter growth may well come in even closer to 2%, analysts at ING Financial Markets said.
This deteriorating outlook for U.S. interest rates, with 10-year Treasury yields falling to 1.87% from 2.06% a week ago, coincided with a softer monetary outlook in many other countries in the Group of 10 industrial nations, meaning that Japanese investors will show even less interest in putting their money abroad.
Apart from the relative rate outlook, there is also another decline in global market sentiment as Greek debt negotiations are proving even more difficult than expected. The continued, and some may say increased, risk of a Greek default means that the yen’s safe haven role will return, making the currency more attractive to foreign investors than it has been over the last few weeks.
But, there are two reasons to believe that the Bank of Japan, under instruction from the Ministry of Finance, will be even more aggressive about stopping the yen from rising than it was before.
Japanese trade and Japanese deflation.
Last week, new data showed that the country had run a trade deficit in 2011 for the first time since 1981, partly because of the impact the yen’s recent strength has had on Japanese exports.
The authorities will be more keen than ever to prevent a strong yen from incurring more damage to the country’s export prospects, especially the weak state of Japanese domestic demand.
But probably of even more concern for the Bank of Japan will be the risk of more deflation. As Commerzbank points out, a stronger yen will push import prices even lower and, with nominal interest rates down as far as they can go, the real level of rates will start to rise.
“Nothing would be more dangerous for the fiscal situation of Japan,” Commerzbank says.
So as the dollar falls back down close to its recent low at Y75.31, the Bank of Japan will be coming under pressure to stop the move and stop it soon.
Bloomberg TNI FRX POV
Reuters USD/DJ
Thomson P/1066 or P/1074
(Nicholas Hastings is a Senior Correspondent in London for Dow Jones Newswires who has written about foreign exchange for more than 20 years. He previously covered a variety of markets, including equities, fixed income, commodities and energy. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com or on twitter @NickHastingsDJ)
Italy bill sale success boosts mood ahead of Monday test
By Valentina Za
MILAN, Jan 27 (Reuters) – Italy’s six-month funding costs fell sharply on Friday to levels last seen before the country came to the fore of the euro zone debt crisis last summer, helping power a rally in its bonds ahead of Monday’s morechallenging sale of longer-dated debt.
The successful 11 billion euro bill auction followed a well-received short-term bond sale the previous day, reinforcing more positive market sentiment towards Italy ahead of its offer of five and 10-yearbonds next week.
Rising hopes that Greece will strike a debt restructuring deal with its private creditors, clearing the way for a second bailout to avert a messy default in March, also helped drive down yields on Italian paper on Friday. “The fact that longer-term yields are finally falling shows some tentative signs of interest for Italian paper also among foreign investors,” said Alessandro Giansanti, a strategist at ING in Amsterdam. “It bodes well for Monday’s auction.”
Thisweek’s auctions were the first since Standard & Poor’s cut Italy’s long-term credit rating to BBB+ earlier this month as part of set of euro zone sovereign downgrades.
The European Central Bank’s nearly half a trillion euros of ultra-cheapthree-year loans to banks had boosted demand for short-dated Italian and Spanish debt in recent weeks, but investors had been less keen to buy riskier longer-term paper.
On Friday, however, the yield on the 10-year benchmark bond <IT10YT=TWEB>Italy will sell on Monday fell to 5.84 percent, the lowest level since the end of October.
Worries about Italy’s ability to service its debt pile, the world’s third-largest, peaked in November and precipitated a change of government. Rome hassince striven to regain market confidence through belt-tightening measures and long-delayed measures to liberalise its economy.
Domestic banks are believed to have used part of the 116 billion euros they borrowed at December’s unprecedentedoffering of three-year liquidity to snap up short-dated Italian debt which can be returned to the ECB as collateral, and its next three-year tender in February is seen further feeding demand.
But Italy also needs foreign investors to help itrefinance some 90 billion euros of bonds falling due between February and April. Monday’s sale of up to 8 billon euros of five- and 10-year bonds will provide 2012’s first significant test of demand for these longer-dated securities.
SHORT-TERM ISSUANCE
Analysts caution it is too early to say Italy has turned a corner, but a fall in the interest bill on its short-term debt costs will help the country’s push to cut its budget deficit.
“A one percentage point drop in theaverage T-bill yield reduces interest payments by around 4 billion euros over a year,” said Intesa Sanpaolo analyst Chiara Manenti.
At Friday’s sale, Italy’s six-month debt yields fell to 1.97 percent, well below the 3.25 percent it paid a monthago and dramatically lower from the euro lifetime record 6.5 percent investors demanded at an auction in November.
It was the lowest six-month auction yield since May – before a sell-off of Italian assets started in early July – and comparedwith the yield of 1.85 percent Spain paid this week to sell 1.1 billion euros of six-month bills.
As the market’s focus appears to shift away from Italy and Spain, Portugal is back in the firing line as investors fret that Lisbon will followAthens in seeking a fresh bailout and a debt restructuring.
Italy has said it plans to take advantage of firmer demand for short-term debt in the first part of the year but the outcome of Friday’s sale showed heavier issuance may be weighing ondemand. The 8 billion euro auction of six-month T-bills was covered 1.3 times, down from 1.7 times at a slightly bigger sale in late December.
“The bid-to-cover ratio is the lowest in a year on T-bills. Nothing to worry about, but just a signthat the significant amount of bills the Treasury is pushing through may in the future turn out to be a little problematic,” ING’s Giansanti said.
(Additional reporting by Milan government bonds team; Editing by Catherine Evans) Messaging: valentina.za@thomsonreuters.com)
Pelias' views 