The Euro was pressured as we had a combination of concerns about the sovereign debt situation mingling with poor macro data. It overshadowed what was a decline in yields in Italy and Spain.
1. Fitch hurts risk sentiment as it channels of Sarkozy.
From Bloomberg: The euro declined against all but one of its 16 major counterparts after Reuters reported Fitch Ratings' head of sovereign ratings David Riley as saying the European Central Bank should boost bond purchases to support Italy and prevent a cataclysmic collapse of the shared currency.
I refer to Sarkozy's comment in which he said the death of the single European currency would mean the end of Europe and the end of peace.
2. Greek restructuring talks heat up.
Talks on a bond swap between Greece and private creditors to halve its debt load are nearing a deal with banks asking for enhanced return if the economy does well, banking and official sources said on Tuesday as pressure builds for an agreement.
The issue is that part of the players holding Greek debt - mainly hedge funds - do not want to agree to voluntary 50% haircuts, unlike European banks which are under more intense pressure to agree by politicians.
A failure here would put into jeopardy the 2nd Greek bailout and would cause negative implications for European markets.
3. Slew of economic data combined to work against the Euro.
Excluding a further deterioration in market confidence, the biggest risk facing Europe is a further slowing in growth, which will complicate austerity and recovery efforts, and weigh on the euro.
Wednesday's session saw a barrage of poor macro data.
- German economy contracted by 0.25% in Q4, according to its Federal Statistics Office - official release due Feb 15th.
- Euro-area final version for Q3 revised lower to 0.1% q/q from 0.4% q/q.
- Spanish industrial production declined -7.0% y/y vs an estimated -5.4%, the worst decline since Oct. 2009.
- In Greece, CPI rose 2.2% y/y vs estimated 2.7% y/y - the decline is seen as a symptom of economic downturn.
- Fitch says its likely to downgrade Italy after its review of 6 euro-zone countries on negative credit watch is done.
4. Strong demand for German bond doesn't matter, nor do falling yields in Italy and Spain.
Germany saw strong demand for its bond sale, but it didnt' help to quell market bearish view on Euro, and actually is a sign that investors are scrambling for safest assets.
From Financial Times: Germany's five-year bond auction attracted bids for more than double the targeted amount on Wednesday, underscoring the country's status as the eurozone's safest haven despite the country's wilting economic growth.
The German debt management office received bids of €8.97bn for the sale of €4bn in five-year notes on Wednesday, the Bundesbank said in a statement. The notes carried a coupon of 0.75 per cent and were sold at an average yield of 0.9 per cent.
For a technical analysis look at EUR/USD, see today's technical update: EUR/USD - Heavy Price Action Suggests Bearish Continuation