Currencies rebounded to the upside during the European session today, despite the downbeat Italian bond sale and the flow of downbeat fundamentals and news from Europe, where all eyes are focused on the finance ministers to quell jitters and restore confidence.
Europe remains the main focus in the market, while pessimism is still evident ahead of the finance minister meeting's results today, where investors are looking forward with hopeful eyes that policy makers will finally implement the measures approved earlier, including the usage of the European rescue fund in fighting back the debt crisis, providing governments with credit lines especially when the euro-area region is projected to slip back into recession and finally intervening in the bonds market to quell jitters and control the rapid incline seen on yields.
The euro rebounded to the upside, extending the gains recorded against the U.S. dollar, where the high yielding currency is affected by speculation in the market that European lawmakers will be able to restore confidence by boosting the firepower of the European Financial Stability facility.
The euro benefited for the first time from the downbeat Italian bond sale, as in our point of view the rising yields on Italian bonds, could pressure finance ministers, who are meeting, to find an applicable solution to control the rapid incline seen on yields along with solving the debt crisis itself.
The market reaction towards the Italian bond auction could mean the investors believe that Italy is too big to fail, and they doubt that Italy could default or seek bailout, where demand on Italian bonds exceeded the quantity offered, which in result indicate that investors seek to hold Italian debt to benefit from rising yields.
The Treasury sold 3.5 billion euros of three-year bonds at a record 7.89% interest surging from the last sale at an interest of 4.93% in October a clear notion of the rapid deterioration in market sentiment; however, demand was 1.35 times the quantity offered. Italy also sold 1.5 billion of 2020 at an interest of 7.28% and also 2.5 billion of 2022 at 7.56% up from 6.06%, while demand exceeded the quantity offered with a bid-to-cover ratio of 1.27.
The U.S. dollar index (USDIX) declined sharply after the opening of 79.16, as investors' appetite for risk improved today, which sent the index to a low of 78.52, after setting the highest at 79.36 earlier today. The index trades now around 78.67.
The EUR/USD pair rebounded sharply to the upside to reach a high of $1.3441, benefiting from the Italian bond sale and ahead of the finance ministers' meeting; however, the euro gave up some of the gains recorded to currently trade around 1.3394. The pair opened the session today at $1.3318.
The sterling pound also rebounded sharply to the upside ahead of Osborne's Autumn statement to Commons, where the GBP/USD pair after opening the session at $1.5507 advanced sharply to reach a high of $1.5655 on expectations Osborne will announce further stimulus starting from next year to spur growth and restore confidence after U.K. lost faith in the euro zone and decided to act individually.
The Australian dollar gained the most against the U.S. dollar, as the high yielding currency is linked directly to the risk appetite seen in the market. The AUD/USD pair started the day at $0.9902 and appreciated to a high of $1.0076, and is currently hovering around $1.0045.
The weak U.S. dollar also lost strength against the low yielding yen, where after the opening of 77.96, the JPY/USD pair flactuated between a high of 78.28 and a low of 77.60, and is currently trading around 77.68.