Euro Developments Point to More Weakness Despite Directionless Trade

Some initial currency bids on news of an agreement between the Greek PM and opposition leader to form a new unity government to approve the EU/IMF bailout were easily absorbed early Monday, with the market coming back under pressure as broader fear of contagion into the Italian economy became more of a reality. The political turmoil has spread to Italy and many are focused on the budget vote out of the country which could open the door for additional deterioration within the broader Eurozone economy. Italian bond spreads have since widened to record levels.

Elsewhere, the Franc is the weakest performing major currency on the day thus far, with Eur/Chf off to the races following some Franc bearish comments from SNB Hildebrand over the weekend, much softer CPI data and increased speculation that the central bank will make another move to raise the Eur/Chf peg.

The Australian Dollar is also one of the weaker currencies on the day, with the risk off market environment and some softer ANZ job ads weighing on the higher yielding currency. Another theme weighing on sentiment in the early week could also be coming from a lack of response from the G20 on the Eurozone, with the group instead opting to let the zone deal with its own problems rather than injecting its own money into the problem.

Still, markets haven’t strayed too far on Monday, and in the end, we have seen some more intraday volatility and consolidation. Economic data out of the Eurozone on Monday was softer across the board, highlighted by some unnerving Eurozone retail sales and German industrial production prints, but a suspicious rally ahead of North America took the Eur/Usd market back towards daily opening levels, with sources attributing the gains to rumors that Italian PM Berlusconi would be stepping down.

Looking ahead, economic data in the US is a non-factor, with the only notable release coming in the form of US consumer credit. On the official circuit, Fed Rosengren, EU rehn, SNB Jordan and EU Barroso are all slated to speak. US equity futures are tracking moderately lower, while commodities are bid, led by a +1% rise in gold prices.