The Squeeze is on for EUR Shorts

The Euro is rallying strongly across the board coming into the Trichet
press conference - just a squeeze or is there more fuel for further
strength? Also - ugly employment data out of Australia - can AUDUSD
maintain parity?

A "successful" Spanish auction of €3 billion in 5-year bonds (yes
the buyers were probably mostly the ECB and China, but a sale is a
sale and yields dropped as Spain met its maximum target for the sale)
is clearly sparking a rally in the Euro across the board. The 200-day
moving average in EURUSD provided only temporary resistance yesterday
at 1.3070 and now the pair has vaulted as high as 1.32+, elsewhere
EURCHF is on a rocket ride in recent days and the single currency has
even managed to fight back against the Scandies. It appears the
credibility of the short term demand for EuroZone debt is sufficient
to trigger a widespread consolidation that may last for a while. We
would suggest that this consolidation might have the most potential in
crosses like EURAUD and EURNZD if we have a look at interest rate
spreads and likely market positioning.

It will be important, however, to continue to track not just bond
spreads, but also CDS prices, as the market is clearly cynical on the
longer term potential for PIGS countries to repay their debts. For
example, while Irish/German debt spreads have come in recently, the
CDS prices for Ireland continued to blow higher with only a couple of
days of consolidation here that still leaves prices above the previous
late November high, suggesting that the market is fretting the
potential for a political decision to default, perhaps not long after
the (expected) late March election in Ireland.

Trichet was out in his press conference saying that the ECB rate is
appropriate and warning that countries need to do more to consolidate
fiscally and made a lot of noise about the ECB never "pre-committing"
on interest rates (a supposedly hawkish hint - but c'mon, ECB isn't
hiking any time soon.). There was minor worry expressed about
inflation.

*Australian employment data*
The Australian employment data finally came in at weak levels after a
long string of very strong reports. This adds to the picture of an
economy that is increasingly a one-tricking pony (mining industry) and
the recent floods are threatening that lynchpin industry as well.
Still, Australian rates somehow managed to rally despite the news as
the bond rally earlier this week on the flooding news and statements
that it might cost a full percent of Australia GDP might have been
exaggerated. Looking at today's markets, we have gold and other metals
rallying, new high prices in the grain complex and risk appetite still
largely on the up and up (or at least not consolidating much). This is
pushing AUDUSD slightly above parity. Technically, we wonder if the
pair is in a structural turnaround process - arguably the case after
the new highs from late last year failed to hold. If so, the next key
resistance is around 1.0085, the 0.618 FIbo retracement of the move
from the 1.0250 top to the 0.9805 low.

*US data*
The weekly claims data showed a very ugly jump for the week to 445k,
the worst weekly reading since last October and a nasty blow to the
idea that the US job market is recovering. This is hopefully a one-off
blip created by the firing of seasonal holiday workers by retailers
(this blip is always there and the data is heavily adjusted because of
this known seasonal effect, but the timing of the surge can vary from
year to year). For perspective, the raw claims number was actually
770k) - so let's wait for the next couple of weeks of data before
jumping to any conclusions. Other data pointed to less disinflation in
the PPI than expected and a smaller than expected trade balance. The
ex-petroleum trade balance was actually the smallest since April of
this year at -18.2B.

*US austerity*
The US state of Illinois passed an large new tax hike that raises the
state income tax from 3% to 5% retroactive to January 1 in an effort
to staunch the state's bleeding. We have to remember that state and
local authorities are an important part of the overall US fiscal
picture and face the need to tighten belts almost without exception
this year and in coming years from pension pressures and revenue
shortfalls (much of the revenue comes from property taxes which are
obviously sharply lower from a few years ago with the fall in real
estate values). The only way around this would be a "QE3" from the
Fed, as Fed observers suspect that local public debt is a possible
target for the Fed if the US economy double dips.

*Looking ahead*
The move in the Euro is very strong and may put a floor in many of the
Euro crosses for now. Besides the powerful Euro rally, we're also
seeing the USD sharply weaker across the board and USD bulls are
certainly under pressure here to prove their case after last week saw
a sharp consolidation in USD strength. On the risk appetite front, we
would note that food and energy prices arcing to new highs eventually
must wear on confidence in bidding up asset prices. EM trades in
particular could come under threat with any further rally in key
commodities due to their more intensive use of commodities per unit of
GDP.

*Chart: EURAUD*
EURAUD rallying like mad as the Euro is strong across the board. We
pointed out the strong divergence in interest rates between Europe and
Australia just a couple of days ago (see the bottom of the post), and
the relief in sovereign debt spreads and default risk today is seeing
the Euro up versus just about everything. This squeeze could have a
way to go. Look back at examples in May and July of last year to see
what kind of upside we could see here as long as the Euro news flow
remains relatively positive.

*Economic Data Highlights*
* New Zealand Dec. Credit Card Spending fell -0.9% MoM
* New Zealand Dec. QV House Prices fell -0.9% YoY vs. +0.3% in Nov.
* Japan Nov. Machine Orders fell -30% MoM and rose +11.6% YoY vs.
+2.0%/+17.4% expected, respectively and vs. 7.0% YoY in Oct.
* Australia Dec. Employment Change out at +2.3K vs. +25k expected
and 54.6k in Nov.
* Australia Dec. Unemployment Rate fell to 5.0% vs. 5.1% expected
and 5.2% in Nov.
* Japan Dec. Machine Tool Orders rose 63.5% YoY vs. +104.2% in Nov.
* Germany Dec. Wholesale Price Index rose +1.8% MoM and +9.5% YoY
vs. +7.8% YoY in Nov.
* Sweden Dec. CPI rose +0.7% MoM and +2.3% YoY vs. +0.8%/+2.4%
expected, respectively and vs. +1.8% YoY in Nov.
* Sweden Dec. Underlying Inflation rose +0.6% MoM and +2.3% YoY as
expected and vs. +1.9% YoY in Nov.
* UK Nov. Industrial Production rose +0.4% MoM and +3.3% YoY vs.
+0.5%/+3.3% expected, respectively and vs. +3.5% YoY in Oct.
* UK Nov. Manufacturing Production rose +0.6% MoM and +5.6% YoY vs.
+0.4%/+5.3% expected, respectively and vs. +5.8% in Oct.
* UK Bank of England left interest rate unchanged at 0.50% and asset
purchase target unchanged at £200B as expected
* EuroZone ECB left interest rate unchanged at 1.00% as expected
* Canada Nov. International Merchandise Trade out at -0.1B vs. -2.0B
expected and -1.5B in Oct.
* US Weekly Initial Jobless Claims out at 445k vs. 410k expected and
410k last week

US Weekly Continuing Claims out at 3879k vs. 4088k expected and
4127k last week
US Dec. Producer Price Index out at +1.1% MoM and +4.0% YoY vs.
+0.8%/+3.8% expected, respectively and vs. +3.5% YoY in Nov.

* US Dec. PPI ex Food and Energy out at +0.2% MoM and +1.3% YoY vs.
+0.2%/+1.4% YoY expected and +1.2% YoY in Nov.
* US Nov. Trade Balance out at -$38.3B vs. -$40.5B expected ad
-$38.4B in Oct.
*Upcoming Economic Data Highlights*
* UK Dec. NIESR GDP Estimate (1500)
* US Fed's Bernanke to participate in small business lending panel
(1800)
* Japan Dec. Domestic CGPI (2350)
* China Nov. Conference Board Leading Index (0200)
Source: ActionForex.Com