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There have been some sharp declines in risk assets today, European stock markets are eroding recent gains and the Eurostoxx index of the 50 biggest companies in the currency bloc is down more than 2% today. The Eurozone crisis has flared up – this time protests in Madrid and a general strike in Greece have spooked the markets.

 

Could Spain break up?

 

Spain is a bigger risk than Greece today, in our view. The protests were sparked by the 2013 Budget, which is being debated in Parliament this week and is due to be approved by the government at 1300 BST tomorrow. The protestors definitely don’t want any more austerity, Spain’s economy is already mired in recession and the unemployment rate is nearly a quarter of the work force. However, there is also a deeper concern: that the Budget won’t be warmly accepted by the markets, which could then force Madrid to request financial aid complete with more austerity conditions in the coming weeks. The Spanish people don’t want to go the way of Greece, and so they don’t want a sovereign bailout. This is being reflected in the polls. Catalan nationalists have apparently consulted Brussels about how they can break away from Spain and become self-governing. The leader of the Catalan region has talks with Spain’s PM tomorrow, during which Catalan is expected to ask for control of its own tax revenues, which are some of the largest in Spain. To put this in perspective, Catalan has an economy the size of Austria’s.

 

Can the Spanish regions survive without their parent? 

 

The problems Spain faces are multiple: to get its finances on a stable footing it needs to get control of the regions that have caused the mess in the public finances in the first place. However, the economic crisis in Spain has caused a wave of nationalism in the regions that have culminated in Catalan making a quest for freedom. The break-up of Spain is now a possibility as a direct result of the sovereign crisis and now investors has another layer of uncertainty to contend with. To make this situation even more complex Spain is expected to pay Catalan’s EU500mn bond redemption in the coming days after the region formally applied to tap Spain’s regional bailout fund yesterday.

 

EURUSD gets hit by another wave of panic

This is mind-boggling stuff and the impact on the euro has been for it to sell off as investors flock to the safe havens like the yen and the US dollar. It has dipped as low as 1.2847 so far today and could be at risk of another sell off if we get more unrest in Spain tonight and the violence also infects the  strike action in Greece. A close below 1.2865 – the 200-day sma – is a bearish development for this pair as it suggests that momentum may be about to gather on the downside. Below this level opens the way to 1.2750 – the 100-day sma – then 1.25 – the level we bounced from after the announcement of the ECB’s OMT programme. The strikes have spooked investors that Spain will delay requesting a bailout, and thus fail to trigger the ECB’s OMT programme. This may cause another flare up of sovereign concerns and the Spanish 10-year bond yield rose above 6% at one point this morning.

The OMT matters for the Eurozone, as rating agency Fitch’s sovereign update for Europe made clear. It praised the OMT and the ESM and said they were a bridge to structural economic reform for the region. It also said that negative growth and fiscal surprises could cause a sovereign downgrade for the region. So although the OMT may only be buying governments’ time to get their finances under control, without  the OMT it  would mean the currency bloc has run out of time and we could see risk assets sell off sharply and volatility spike.

Why we could see a anew paradigm for XAUEUR

Overall, risk is off and this means the dollar is rising along with the yen. The yen crosses are approaching some key levels. AUDJPY is already below the daily Ichimoku cloud, a key support zone at 80.85, which is also the start of a technical downtrend. GBPUSD is also looking vulnerable as it sold off sharply after failing to make fresh 12 month highs above 1.6310 yesterday. It appears to be well supported above 1.60, but the direction of this pair will depend on how the latest bout of Eurozone fear pans out. Oil and stocks are lower, but the gold price remains fairly well supported, which is a bullish signal in the medium-term although we wouldn’t look to establish a long position unless we pull back towards $1,750. Gold priced in euros is getting interesting. It is approaching EU 1,370 per ounce, a euro era high. If we continue to see euro weakness then XAUEUR could break above this key level and signal another leg higher for this pair. Support lies at EUR1,350. We would look to establish a long on a break above this key level as it could be fairly sticky due to its significance as a resistance zone.  Watch out for continued strife in Spain later today and also US new home sales, although we think European concerns will dominate.

 

Chart: XAUEUR daily

 

Source forex.com

 

Best Regards,

 

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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