Spanish Crisis Sees Investors Flocking To Safe Haven JPY And USD

Unsurprisingly, the combination of risk-off sentiment and most investors choosing to watch the action from the sidelines created a toxic environment for risk assets. Renewed fears about a possible full blown Spanish bailout are at the forefront of investor sentiment as the sovereign’s borrowing costs stubbornly remain at unsustainable levels. It appears the market doesn’t think the Spanish government will adhere to the saving measures passed by Parliament last Thursday, or that the bailout funds designed to alleviate pressure in Spanish banking sector will be sufficient.

Adding to investors’ misery are renewed concerns that Greece will be forced to exit the euro, with many doubtful Athens will be able to abide by the terms of its bailout. Hence, when combined with the low levels of volume, the aforementioned trepidations are providing market participants all the reason they need to be short risk assets.

The resulting price action has sent investors flocking to the safe haven status of the yen and USD, with most of the majors only just holding above some key support levels. EUR/USD has thus far managed to hold its ground above 1.2100, yet this may change quickly if the European bond markets don’t behave overnight, especially during some key bond auctions. AUD and other commodity currencies were hit harder than the euro, but this was to be expected given the inflated prices that resulted from investors pricing in more easing from the Fed, and other central banks for that matter. Hence, AUD/USD quickly left 1.0400 in its wake, before finding some support around 1.0300.

Nonetheless, the aussie was momentarily lifted by better than expected PPI data out of Australia, which printed at +0.5% q/q (exp +0.3%, prior -0.3%). Ironically, it is likely because of a relatively lower aussie dollar that the PPI number rose from the prior quarter. Yet, unsurprisingly, AUDUSD quickly retraced its gains on the back of the better than expected PPI data, as the risk negative atmosphere dominated price action.

However, the producer prices figure doesn’t materially change our expectation that the Q2 CPI figure released later in the week will disappoint the market. In fact, we still think the number will provide the foundation for another 25 bps rate cut by the RBA.

In the meantime, the market’s attention will likely remain on European bond markets tonight to see if the upward pressure that is driving Spanish bond yields is seeping into neighbouring borrowing costs. At the time of writing, it appears European markets are set to open in negative territory.

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