A$ leads risk currency charge higher; Spanish borrowing costs push above 7%

The Aussie dollar continued its week of milestones overnight, forging new six-week highs against the greenback, while continuing its record breaking run against the out-of-form Euro. Solid earnings outlook from U.S tech stocks continued to be a supportive backdrop for equity markets, while expectations the Fed will embark on another round of quantitative easing, and higher crude prices on Middle Eastern tensions have both been negative directives for the U.S dollar. In economic news, U.S home sales, leading indicators, and Philadelphia Fed manufacturing index all failed to meet expectations, while weekly jobless claims also rose in excess of forecasts.

News German Parliament approved Spain’s banking bailout assisted European markets to look on the bright-side, amid further uncertainty from the periphery, with rising borrowing costs remaining a key point of contention. After a well-attended auction earlier this week, a sale of longer dated Spanish debt was met with lacklustre demand. Risk premium demanded for 5-year debt surged to a euro-era high of 6.459 percent, from 6.05 percent in June. This encouraged higher yields across the curve with 10-year borrowing costs pushing back above the 7 percent region. The growing disparity between the periphery and the heart of the Euro-zone was made particularly apparent after a sale of French debt of comparable maturity demanded 0.86 percent at auction. While Spain has sought assistance for its ailing banking sector, the additional risk premium demanded for Spanish debt suggests an inability to break the negative feedback loop between the struggling banking sector and the sovereign itself. Diminished appeal for Spanish government debt has reinforced expectations a sovereign bailout may be just around the corner.

Although we’ve seen relative calm in the region, these underlying concerns continue to manifest negatively in the Euro, with the shared currency remaining out of favour against its risk counterparts, while broader FX trends have been supportive of other risk-related currencies. After peaking above the 1.23 region in early European trade, the Euro resumed its descent before bottoming-out at 1.2228. The Australian dollar continued its record-breaking run against the Euro, with the EURAUD pair falling to fresh Euro-era lows of 117.41, while EURGBPforged new multi-year lows. Data on the local docket today includes second quarter Import and Export price index, across the Tasman, New Zealand markets will be closely watching the release of credit card spending data.