Euro testing 1.2500 as Catalonia “asks for help”

Catalonia, Spain’s richest region, asks for help from the Spanish central government on debt refinancing. The EU is fast running out of time and the leadership doesn’t appear in any particularly hurry – a scary combination.

Today’s must read is an article from Bloomberg discussing whether Germany’s Merkel may be open to some kind of “third way” on EU debt. In this solution, there would be a “redemption fund” that Germany would participate in that helps sovereigns scale back their debt to GDP ratio to 60%, but in return, the countries receiving the funds must commit to reforms on a constitutional level. This is a terribly burdensome and bureaucratic thing to implement – therefore it has a high likelihood of receiving a lot of attention by EU officialdom.  . Stay tuned.

The Euro bounced around in a fairly tight range today, bnot finding much inspiration from the news flow earlier in the day and then plunging to a new low in early US hours. A breaking story (Reuters) in Spain describes a Catalonia region request for government help as the region is running out of debt financing options. And where is Spain to get the funds, exactly? EURUSD is poking at the key 1.2500 level and EURGBP has seen all of its gains from early in the day unwound as it probes toward those recent multi-year lows well below 0.8000.

Remember that any solution to the Euro crisis that sees freer reigns for the ECB (I assume the likelihood of which is correlated with the degree to which union members commit to preserving the union) is not necessarily Euro bullish beyond a first flush in short positioning because of the potential quantitative easing angle. At this point, however, it still appears that the EU leadership is moving far too slowly for the market. Sovereign spreads failed to take heart at the “third way” proposal, as Spain’s 10-year yield benchmark bounced back higher after a probe to new lows. At the non-Germany “core” however, bond yields are sharply lower in recent days, France’s 10-year yield is now a mere 2.50% today after a huge rally in bonds yesterday.

Looking ahead
It’s a three day weekend for the US, with Memorial Day on Monday. The lack of further consolidation impulse today in the USD majors is a bit surprising to me (see, for example, my chart from this morning: USDCAD showing momentum divergence and the bounce back in fixed income has been very strong today, so my more “laid-back consolidation before a renewed” rally scenario for the USD I have been expecting over the last couple of days may never really get off the ground. Note as well that the ideal resistance at 1.2620 in EURUSD held, as this was the previous low for the year. Let’s see how the day/week closes today, which will establish the market temperature heading into next week.

Other stories and issues to ponder this weekend include whether a large new response is under way from the major central banks (see Steen’s chronicle from earlier today)  
Have a great weekend.

Economic Data Highlights

• Germany Jun. GfK Consumer Confidence out unchanged at 5.7 vs. 5.6 expected

Upcoming Economic Calendar Highlights (all times GMT)

• US May Final University of Michigan Confidence (1355)
• UK May Hometrack Housing Survey (Sun 2301)
• Japan Apr. Corporate Service Price Index (Sun 2350)