Euro surges on solid demand at European debt auctions - Aug 17

The single currency edged higher after finding buying interest at 1.2805 in Asia and rose strongly to 1.2917 in Europe, as eurozone economic sentiment rose to 15.8 against the expectations of 9.3 and the reading of 10.7 in July. The results of Irish bond auction (Ireland got 2.695 billion and 2.39 billion euros bids for 2014 and 2020 respectively and sold 1.5 billion euros in an auction of 2014 and 2020 paper) gave support to the single currency. Later, euro retreated from there on profit-taking and briefly fell to 1.2835 before moving sideways in NY afternoon.

Euro was also supported by strong demand in Spanish debt auction. Spain sold 5.51 billion euros of treasury bills (the top end of its target of 4.5-5.5 billion euros) with yield falling from last week.

Germany has set a record low 2.25% coupon on its new 10-year Bund to be sold on Wednesday after the yield on the outgoing 10-year Bund fell to a record low 2.31% in the secondary market on Monday driven by a gloomy global economic outlook.

The greenback ratcheted higher against the Japanese yen in Asia after extending decline from last Friday's high of 86.39 to 85.11 in Australia, as Japanese Prime Minister Kan is likely to meet BOJ's Governor Shirakawa and the meeting might be pushed forward to later this week depending on market developments, and dollar climbed to 85.54 in Europe. Later, although dollar retreated briefly to 85.21 after the release of U.S. PPI and housing starts data, it rose again and hit an intra-day high of 85.69 in NY morning before stabilising.

U.S. July PPI rose by 0.2% m/m and 4.2% y/y as expected versus -0.5% m/m and 2.8% y/y in June respectively. Core PPI came in at 0.3% m/m and 1.5% y/y, higher than the economists' forecast of 0.1% m/m and 1.3% y/y. U.S. housing starts increased by 1.7% to 546,000 unit rate (consensus 560,000) versus 537,000 unit rate in June whilst housing permits dropped by 3.1% to 565,000 unit rate (consensus 580,000) against 583,000 unit rate in June.

U.S. equities rose strongly on Tuesday due to upbeat corporate earnings. DJI surged by 104 points or 1.01% to 10406, while FTSE-100, CAC-40 and DAX also rallied by 1.41%, 1.82% and 1.57% respectively.

Earlier, Satoshi Arai, Minister of State for Economic and Fiscal Policy, said Japanese government to start debating stimulus steps on Aug 20. He added 'yen rise may not cease with verbal intervention and may be in final stage. We need to watch yen rise for now.'

In other news, Watanabe (Mr. Yen), the former Ministry of Finance official and now the head of the state-backed Japan Bank for International Cooperation (JBIC), said that the current moves of yen were stable and no need now for action to stem the rise of yen. He added that Tokyo might step into forex market if daily yen moves became rapid and yen would weaken before long and would not rise sharply above 85.00 versus dollar, however, his comments did not represent the Japanese government.

Although the British pound ratcheted higher in tandem with euro in Asia and rose to 1.5696 ahead of European opening after retreating from Monday high of 1.5703 to 1.5636, cable dipped briefly after the release of U.K. inflation data. Later, sterling fell again and tumbled to an intra-day low of 1.5552 on cross selling in sterling versus euro in NY afternoon (eur/gbp rallied from 0.8186 to 0.8282).

U.K. consumer price index fell to 3.1% in July as widely expected versus the reading of 3.2% in June, suggesting U.K. interest rates will remain at their record low of 0.5% well into 2011.

On data front, German ZEW index came in at 14.0 in August, much weaker than economists' forecast of 21.0 and well below 21.2 in July.

Economic data to be released on Wednesday include: Australia Westpac leading economic index, Japan Leading indicators, U.K. BOE meeting minutes.