EUR/USD Pressing 1.3 as Spain Weighs, Yen Broadly Higher: April 16, 2012

Euro weakens broadly as the week starts and is back pressing 1.3 level against dollar as being weighed down by worry on Spain. As Spanish 10-year yield is climbing back towards the unsustainable level which eventually led to the bailout of Greece, Ireland and Portugal, Spanish officials called for more bond purchases by ECB. Nonetheless, recent comments from ECB officials revealed a split stance on the issue among policy makers.

Markets are also getting a bit more nervous on the issue as Spain will face more tests will the auction of 12-month and 18-month bills tomorrow and, more importantly, auction of 2014 and 2022 bonds on Thursday. All eyes will be on whether Spanish 10-year yields will move away from 6% level this week, and on which direction.

Broad based weakness in Asian equities helped send the Japanese yen higher against other major currencies. BoJ is expected to expand the quantitative easing program last in April but that provided little to halt the yen's rebound. Recent weakness in US Treasurys is part of the force that dragged down yen crosses in generally, in particular USD/JPY.

The weekly close below 2% level in US 10-year yield does open the way for further rally in bonds to push yield back below 1.8%. In addition, revival of talks of QE3 and ECB's non-standard measures, be it SMP or another round of LTRO, added pressures on yen crosses too.

The People’s Bank of China widened the trading range of RMB against USD by +50 bps to 1%. This is viewed as a step further to the internationalization of the country’s currency. More importantly, it's a sign that Chinese authority is viewing the current level of yuan as near to equilibrium and yuan's appreciate could now slow ahead. The US Treasury said that the progress to date is "welcomed" but emphasized that "the process of correcting the misalignment of China's exchange rate remains incomplete, and further progress is needed."

On the data front, Swiss PPI, eurozone trade balance will be the main focus in European session. From US, a number of important economic data will be released including empire state manufacturing, retail sales, TIC capital flow business inventories and NAHB housing market index.