Markets Calmed After Euro Debt Auction

Portuguese Auction Gives Euro Relief

The euro found a bit of relief overnight as a much anticipated auction of Portuguese debt was fairly well subscribed.  The initial results of the auction saw the EUR spike higher against the USD through the 1.30 level, only to be sold off again to settle near the 1.30 mark at the time of writing.  This price action suggests that traders are still dubious as to the prospects for a workable solution to the European debt crisis and as a result there are ample offers in the market to sell EUR at levels above 1.30.  Bloomberg reports that plans are in the works by the EU to put together an aid package for Portugal that would guarantee lower interest rates on bailout loans.  The plan could be in the amount of 60 billion euros and would be an attempt by European lawmakers to subdue the crisis that has caused so much strife in the region.  Many market participants have been questioning the health of the Eurozone due to these debt issues and the viability of the euro as a going concern has even been brought up.  If these reports do come to fruition it would signal that the EU was being proactive in their attempts to contain the crisis rather than bail out nations after they get into trouble.  The market wants to see a concrete plan before they embrace the euro again, so until something tangible is in place we can expect to see price action similar to today’s, where any rally in the euro is met with significant selling pressure. 
M&A Talk Fuels CAD Rally
The Canadian dollar has reached a 32 month high overnight against the USD as news that Cleveland-based Cliffs Natural Resources has agreed to purchase Canadian miner Consolidated Thompson for over $4 billion in cash.  The purchase will be made in Canadian dollars, so clearly the flow will be significant enough to push the USDCAD pair to a new low in the mid 0.98 cent level.  The Loonie has been fairly quiet this week and intraday ranges have been tight as little in the way of Canadian (or international for that matter) data has been enough to knock the CAD from its current strong levels.  From a purely technical perspective the CAD is beginning to look a little overbought and has been able to withstand changes in risk sentiment over the past few weeks with little movement.  The Loonie now seems to be reacting favourably to good economic data from the US, our largest trading partner, but has also been able to withstand recent bouts of risk aversion that have seen other commodity linked currencies falter.  The question on many people’s minds right now is whether or not the Loonie can stay below par for any longer.  Data from Canada has been good but inflation is far from out of control, thanks in large part to the strong Loonie, so the Bank of Canada could be on hold in the near term.  Secondly, an overly strong dollar is far from what our government wants as it places a big strain on our manufacturing sector causing our products to become more expensive relative to the rest of the world.   For the time being it seems as if the CAD will be content to follow the news and equities in order to find direction until something tells us otherwise.  Canadian trade balance figures are released tomorrow and could have a big impact should the figure come out far from expectations.
Aussie Shows Resilience
The Australian dollar is off its recent lows against the US in the 0.98 cent region even as devastating floods continue in Queensland.  RBA board member McKibbin was on the tapes last night suggesting that the floods could wipe out as much as 1% of Australian GDP growth for this year.  This report initially caused a selloff in the AUD but it has come back on good developments in Europe this morning.  The RBA has maintained that they will be vigilant on interest rates should inflation continue to rise, and with commodity prices staying firm there is a good chance this will materialize.  This tightening bias has effectively put in a floor for the AUD for now, while data and equity market developments will continue to dictate price action.
Have a great day.