North American Crosses Under Pressure

Both Loonie and Greenback Heavily in the Red Today

Early price action in North American markets has both the Loonie and the Greenback taking it on the chin in heavy trading as both units find themselves on the defensive—despite a mixed bag of data both at home and abroad.  The USD Index is down 0.78% on the session, yet the CHF and CAD are the only majors ceding territory to the Big Dollar.  Interestingly, the Swiss National Bank is actively talking down the local unit, thereby justifying its decline on the day. Meanwhile, the Loonie remains under pressure despite a better-than-expected trade balance reading and supportive flows from the $1.8 billion acquisition of the Canadian retailer Zellers by US retail giant Target.
Stateside, the USD is reeling from a surprise increase in weekly jobless claims despite a positive trade balance figure and a slightly higher-than-expected Producer Price Index.  Jobless claims rose to 445K last week, largely confirming the underwhelming Non-Farm Payrolls report that was delivered the previous Friday.  That said, the souring sentiment affecting the dollar has a lot to do with a somewhat more buoyant market atmosphere in Europe today, with both the Bank of England and European Central Bank choosing to hold the line on rates as expected as well as their bond purchase programs, which some market participants clearly thought would be expanded.  Both the pound and euro are moving higher on the session as traders begin to trim their net short positions on both.
Spanish and Italian Bond Auctions Support Risk (at least in Europe)
European markets in general are finding support this morning from the day’s bond auctions in both Spain and Italy, which are being characterized as qualified successes.  Spain was able to offer three billion euros of five-year bonds at an average yield of 4.542%, which of course represents a significant premium to comparable German paper, but a much better-than-expected interest rate.  Markets had expected that Spain would be required to offer a 130 basis point increase on the debt from its last issue, but instead only saw its yield increase by 97 basis points—which is why we have chosen to term it a qualified success. At the end of the day, it is hard to call a 1% rise in your debt service a good thing in the grand scheme of things.  That being said, everything is relative at this point in time, especially for the European periphery nations that find themselves in the midst of a generational fiscal squeeze.  While the yield did creep up materially, the bid-to-cover ratio remained positive at 2 : 1, showing that there is still plenty of interest in Spanish paper. 
Italy held a similar three billion euro five-year bond auction today in addition to another three billion via 15-year paper.  As might be expected, the yields came at a lower premium, with the three-year averaging 3.67% (almost a full percent lower than that of Spain) and the longer date being offered at 5.06%.  That said, while the yields were lower, so were the bid-to-cover ratios, highlighting the fact that investors still seem to have plenty of appetite for chasing yield despite the increased risk.  Overall, peripheral nation yields have come down overnight on the news as interest rates have dropped eight basis points on the session, thereby allowing the market to be a bit more bullish on the currencies as well.
Finally, also supporting the euro this morning is news that the European Commission is said to be close to working out an arrangement to double the size of its EU bailout fund to 1.5 trillion EUR.  Though both France and Germany have been running hot and cold on the idea of bolstering the fund’s cash reserves, it appears that the initiative is gaining steam and that the market is likely to see a final proposal in early February.
USDCAD Drifting Higher
As mentioned above, USDCAD is drifting back towards 0.99 despite some supportive fundamental influences for the currency on the day.  The technicals, however, are pointing to a slight short-term retracement, as a number of factors have conspired to build a base of support for the pair in the 0.9840 area.  Should the 0.99 mark be breached to the topside, one would expect the pair to continue higher to the mid-0.99 area, retracing as high as 0.9940 or 0.9960.