Talking Points

• Major Currencies Consolidate in Narrow Ranges vs USD Overnight
• French, Spanish Bond Auctions in Focus to Gauge Debt Crisis Contagion
• Hints of Fed/ECB Cooperation on Funding Sought in Dudley Speech

Currency markets were in consolidation mode in overnight trade, with a lull in headline scheduled event risk and news flow out of the Eurozone keeping the major currencies locked in narrow ranges against theUS Dollar. The calendar is likewise quiet in European hours, putting the spotlight ona pair ofbond auctions from Spain and France.

Borrowing costs are on the upswing overnight, with the average yield on 10-year bonds from the so-called “PIIGS” countries – the Eurozone members most afflicted by the debt crisis – rising toward record highs after a narrow pullback yesterday. With that in mind, traders will carefully watch the bond sales’ outcome, paying particular attention to demand and yields levels for the French auction to gauge the degree of sovereign risk contagion into the core of the Euro area.

Any perceived involvement from theEuropean Central Bank will likewise come under scrutiny. Traders have been pining for ECB President Mario Draghi and company to present themselves as a true lender of last resort, openly offering to backstop Eurozone sovereign debt markets and relieve funding pressures with the strength of their balance sheet to shield debt-strapped countries as they attempt to reform budgets and implement austerity. The ECB has been reluctant to do this, leaning on its narrow mandate to provide price stability, and investors are keenly following the degree of pain that bond markets will have to inflict on Eurozone sovereigns for the monetary authority to begrudgingly step into the breach.

Later in the day, the spotlight will turn to a scheduled speech fromNew York Federal Reserve President Bill Dudley – a known dove – as traders search for any clues suggesting the US central bank is working out some sort of coordinated response to the sovereign debt crisis and its potential spillover into financial markets across the Atlantic. Most importantly, all eyes will be watching for signs that a bilateral arrangement to relieve US Dollar funding pressures in Europe may emerge over the near term, boosting liquidity and bearing down on short-term borrowing costs in the interbank space. Such an outcome would likely prove supportive for risk appetite, weighing on the greenback against itssentiment-linked counterparts.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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