Euro resumed its downward path in the NY session after a short-squeeze above the 1.3500 zone proved short-lived. The common currency traded to a session low of 1.3395 as Greek debt concerns returned to the fore. The debt burdened country surprised markets with a bond auction that attracted little investor interest. Indeed, demand was less than half of what was on offer - a failed auction, if you will. Equity marts in Greece sank more than -2% while the government 10-year note squeeze up a whopping 15 basis points to the 6.44% zone. We have been banging the table on the belief that the debt problems will continue to send Euro lower in the mid/long term. Keep in mind that the true test will come starting in April as the bulk of the debt refinancing in the Eurozone periphery (Portugal, Italy, Greece, Spain) will take place. Should failed auctions become the norm, we should see the common currency scurry below the 1.30 level sooner rather than later.

Speaking of short-term trends in the debt markets and their impact on currencies, we have to mention the continued test of crucial short-term resistance in the US 10-year near the 3.90% level. One must keep in mind the tight relationship between this and USD/JPY (nearly a 90% positive correlation in 2010) and the potential signal a failure or break of this technical level will send. The Friday nonfarm payrolls number is widely expected to print above the 200K mark and this could prove to be a case where the market is setting the bar exceptionally high - and ripe for a major disappointment. Anything south of there would see yields and USD/JPY trade lower. However, we are in the camp that the NFP number will handedly beat expectations (census hiring and weather payback from Feb) and this could prove the catalyst for a move in the US 10-year to a test of the 4.0% mark. Keeping the 2010 relationship in mind, this would suggest USD/JPY closer to the 95/96 realm.