Euro ratchets higher on strong demand for Italian bond auction

[B]Market Review - 27/02/2013 21:28 All times in GMT

Euro ratchets higher on strong demand for Italian bond auction [/B]

The single currency rose on Wednesday as Italy reached its target of its bond auction since the general elections. The upbeat eurozone sentiment data also supported the single currency.

Although the single currency fell initially to 1.3041 in Asia as Moody’s said ‘Italy’s inconclusive election outcome is credit negative; risk of new election cud prolong political uncertainty in Italy; would consider downgrade Italy if economy worsened, reforms stalled’, price ratcheted higher to 1.3123 in Europe due to the strong demand in Italian bond auctions together with the improved eurozone sentiment data before dropping to 1.3067. However, renewed buying interest in euro pushed the pair further higher to 1.3129 in New York morning on improved risk appetite but then retreated to 1.3084 in U.S. morning as the European Central Bank President Mario Draghi said the ECB was far from exiting easy monetary policy. The single currency eventually climbed to 1.3148 near U.S. closing.

Eurozone business climate, economic sentiment and consumer sentiment in February came in at -0.73, 91.1 and -23.6, versus the forecast of -1.04, 89.8 and -23.6 respectively.

In New York session, the single currency got support by comments from Fed Chairman Ben Bernake who continued to defend its monetary easing in testimony and said ‘significant majority of committee favors policies we have taken; hit to growth fm fiscal measures this year is very significant; does not see any significant problems in functioning of MBS and treasury markets; we are still far fm where we would like to be, but low mortgage rates are helping housing market; increase in house prices shud benefit other industries as well.’

Versus the Japanese yen, although the greenback recovered from Tuesday’s low at 91.92 to 92.26 in Tokyo morning, renewed selling interest pressured the pair in Asia and price dropped to 91.14 in New York morning due partly to weak U.S. durable goods data (-5.2% versus the forecast of -4.4%) before staging a rebound. The usd/jpy was supported in New York morning due to the release of strong U.S. pending home sales, which came in at 4.5% versus the forecast of 1.5%, and then rallied to 92.44 in New York afternoon due to active cross-selling in yen on improved risk appetite.

Despite cable’s initial fall to 1.5080 in Asian morning, failure to re-test Monday’s low at 1.5073 triggered short-covering and price edged higher to 1.5165 in Europe due to the comments fm BoE policymaker Charles Bean who said ‘want to make absolutely clear that we do not have plan to introduce negative interest rates’. Later, the pair rose further in tandem with euro to 1.5188 in New York morning but only to tank to 1.5120 at New York midday. The cable was last seen around 1.5150-60 near New York closing.

On the data front, U.K. revised GDP in Q4 came in at -0.3% q/q and +0.3% y/y, vs the forecasts of -0.3% n 0.0% respectively. German Gfk consumer sentiment indicator rose to 5.9 points in March, as expected, from 5.8 points in February.

In other news, ECB President Mario Draghi said ‘recovery in eurozone going very very slowly, sees beginning in H2 of this year;as economy recovers, will see natural shrinking of ECB balance sheet, perhaps without ECB having to take action; fiscal consolidation is unavoidable, question is how to mitigate effects, one answer is to speed up structural reforms.’ German Finance Minister Scaheuble said ‘market doubts following Italian vote have raised risk of contagion; the faster politicians in Italy form stable government, the sooner uncertainty will vanish; there will be setbacks in combating euro crisis, never said crisis had been overcame.’

[B]Data to be released on Thursday: [/B]

Japan Manufacturing PMI, Industrial prod’n, U.K. GfK Consumer confidence, Japan Construction orders, housing starts, Swiss GDP, Germany Unemployment change, Unemployment rate, EU CPI,Germany HICP prelim, CPI prelim, Canada Current account, U.S. GDP annualised, Personal consumption, PCE core, Chicago PMI, Canada PPI.