FOREX: Euro Threatened as Italian CDS Spreads Rise Ahead of Bond Auction

Key Overnight Developments

• Aussie, NZ Dollars Slump as Chinese Manufacturing Slows
• Japanese Manufacturing Narrowly Improves in December

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3141	1.3292
GBPUSD	1.5405	1.5572

The Euro and the British Pound were little changed in overnight trade, inching modestly higher to add 0.1 percent each against the US Dollar. We remain short EURUSD but have been stopped out of our long USDJPY position.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
JPY	23:15	Nomura/JMMA Manufacturing PMI (DEC)	48.3	-	47.3
CNY	2:30	HSBC Manufacturing PMI (DEC)	54.4	-	55.3

The Australian and New Zealand Dollars fell after Chinese manufacturing growth slowed for the first time in five months according to a report from HSBC. The Manufacturing PMI gauge fell to 54.4in December, the lowest since September. China is a key export market for both antipodean countries.

Meanwhile, an analogous report from Japan showed a narrow improvement, with the manufacturing sector contracting at the slowest pace in three months. The Nomura/JMMA Manufacturing PMI gauge rose to 48.3 in December, marking the second consecutive month of gains.

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
EUR	8:30	Italian Business Confidence (NOV)	102.0	101.6	Low
EUR	9:00	Italian Producer Price Index (MoM) (NOV)	0.4%	-0.2%	Low
EUR	9:00	Italian Producer Price Index (YoY) (NOV)	3.9%	4.0%	Low

With little of note on the economic calendar, risk appetite promises to remain the dominant driver of currency market price action. Stock index futures are little changed, offering few clues on where sentiment is likely to head over the near term.

On balance, the outcome of an Italian bond auction may prove most significant, with the Euro Zone’s number-three economy set to offer 8.5 billion euros across short to medium maturities. Italian CDS spreads – the cost of insuring against the country’s default – tapped a four-week high ahead of the auction, hinting the Euro may come under pressure as investors remain jittery about the lingering EU debt crisis. Weekly US Jobless Claims figures as well as November’s Pending Homes Sales report will come into play late into the session.