Euro Shows Surprising Strength on Financial Market Developments

Euro gains on successful Spanish government bond auction. Spain managed to sell the maximum intended EUR3.5 billion of five-year government bonds. It alleviates fears that various factors, like the threat of a potential credit downgrade, undercapitalized lenders, and thinning capital markets liquidity could cause another sovereign liquidity crisis in the euro-zone, bringing back shades of Greece. Instead, we got ample demand for the Spanish bonds and it helped the Euro surge in today's trading.

In a second important development, the ECB lent banks 111.2 billion euros for six days to help them cope with the expiry of its 12-month loans, given out one year ago in an attempt to buttress the European financial system following the financial crisis. Banks needed to repay 442 billion euro in 12-month loans, the biggest amount ever awarded by the ECB. Banks had asked for 121.9 billion euros in three-month loans yesterday, less than expected. Taken together the amount would be on the higher end of what analysts expected banks would need to borrow in new money, but the fact that roughly half of the borrowing is being done on a six-day basis may be reassuring that banks are in slightly better shape than anticipated. Also, the banks that are overly relying on the ECB are on the periphery of Europe, so the stress is not being seen throughout the entire continent.

Aussie Slides on Chinese Slowdown

Other currencies more focused on worries over global growth. Overnight, the Aussie fell as signs emerged that China's moves to cool its economy are working.

Two readings of manufacturing activity showed weaker growth in that sector. The China Federation of Logistics and Purchasing Manufacturing PMI slid to 52.9 for the June period from its 53.9 reading in May. The HSBC Manufacturing PMI was down to 50.3 from 52.7. Its the third month in a row that the index has declined. The 50 level separates expansion from contraction in these reports.

Australian data was not supportive either as building permits slid 6.6% in the month in May, and retail sales posted a smaller than expected 0.2% gain in May as well.

The Aussie had already been sliding sharply this week, and the overnight data caused the AUD/USD pair to fall to the 0.8314 level, before rebounding throughout the European session.

US Jobs Data Disappoints, Yen Extends Gains

In the US, weekly jobless claims jumped again, a weak sign for the US labor market which, which followed weak ADP data, and is ahead of the NFP report. The number of U.S. workers filing initial claims for jobless benefits increased by 13,000 to 472,000 in the week ended June 26.

The USD/JPY broke below its recent support at 88.10 area, falling down to the 87.50 area. The pair has been moving in favor of the Yen as Treasury yields fall in an environment when investors in the US demand the safe haven of Treasuries. However, for Japanese investors this makes the spread between Treasuries and Japanese bonds shrink, weakening the appeal of investing in US debt.

Pound Rallies As Well, Manufacturing Sector Continues Brisk Expansion

The Pound was able to rally, following the Euro, following several session of declines. It may invalidate teh thinking that the GBP/USD rally may be over, though a move above 1.5115 would be needed to confirm a further bullish moementum. The UK Manufacturing PMI showed rather strong results for June, posting a figure of 57.5 which was only slightly below the pace of growth seen in May of 58.0.