Risk currencies dive as Euro area debt concerns reach critical mass

A global bid for safety governed FX market activity overnight with the Euro area the centre of attention. The Kiwi led the risk currency charge lower with the Aussie dollar close behind as risk aversion took hold, leading to solid losses across global sentiment barometers. Once again, markets focused on the economic plight of Southern European economies with Spain, Italy, and Greece in the spotlight. Peripheral bond yields climbed with Spanish 10-year yields reaching peaking at euro-era highs of 7.56 percent – above and beyond the ‘bailout zone’ which marked beginning of the end for debt veterans Greece, Portugal and Ireland, who went on to seek financial aid.

While attempts to ring-fence Spain from its embattled banking sector provided some short-term relief, it’s now clear these attempts have failed to have a sustained effect on market confidence as concerns mount Spain will be the next on the list of bailout casualties. These concerns are exacerbated by fears Europe’s rescue fund doesn’t have the capacity to bailout Europe’s fourth-largest economy. The domino effect has also dragged Italy into the fray which alongside Spain placed bans on short-selling to combat indiscriminate selling across their respective equity markets.

Meanwhile, Greece has returned to forefront of Euro region concerns following reports the IMF may cut off financial support. Although the IMF dismissed the rumor, anxiety over Greece’s ability to adhere to budget deficit reduction targets remains a primary stumbling block.

Euro drama’s kept the Euroon a downward trajectory forging fresh 2-year lows against the greenback for the umpteenth time and new 12 year lows against the Japanese Yen. The Australian dollar has recorded steep losses overnight alongside global equity and commodity markets, erasing much of last week’s gains. The local unit breached the 103-figure late in yesterday’s domestic trade before extending losses as Europe opened for business. With a decidedly negative offshore lead, local markets are behind the eight ball ahead of the release of Chinese PMI today which threatens to pull markets deeper into negative territory. Also in frame this morning is a speech from RBA Governor Glen Stevens in Sydney at 1305 AEST.

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