Euro Debt Crisis Fears Grow Anew, French Bond Sale in Focus

[akats]

The US Dollar (ticker: USDollar) pushed higher against its leading counterparts in overnight trade as Asian stock exchanges fell, stocking demand for the go-to safe haven currency. The sentiment-linkedAustralian Dollar bore the brunt of the selloff – down as much as percent against its US namesake – after the AiG Performance of Service Index printed below the 50 “boom-bust” level, showing the non-manufacturing sector contracted for a third consecutive month, while the Trade Balance surplus narrowed to the smallest in 9 months as exports to China slumped 15.8 percent. The East Asian giant is Australia’s largest trading partner.

Looking ahead, a quiet economic calendar keeps the focus on Eurozone debt crisis issues, with the spotlight turning to a Frenchbond auction. The currency bloc’s second-largest economy is set to sell 2021-2041 paper, with traders keeping a close eye on average yield levels and bid-to-cover readings – a measure of demand – to get a sense of sovereign solvency fears in the region as Eurozone countries face the need to refinance a whopping €157 billion in maturing debtjust in the first three months 2012.

The 3-month Euribor-OIS spread, a measure of liquidity risk, rose for the first time in a week yesterday while the ECB reported that banks parked a record €453 billion in its deposit facility yesterday. This means banks remain jittery and reluctant to funnel any of the nearly €500 billion they borrowed via the central bank’s 3-year LTRO into the real economy. On balance, this points to renewed deterioration in credit markets and may produce a disappointing outcome at the debt sale, weighing on the Euro.

On the sentiment front, S&P 500 stock index futures are trading meaningfully lower in late Asian hours, hinting at the return of risk aversion that offers a lifeline to US Dollar at the expense of stocks-correlated currencies. The US ADP Employment gauge will enter into the picture in the afternoon and may stoke volatility as traders position for Friday’s all-important official jobs report. Expectations call for an increase of 178,000 in December compared with 206,000 recorded in the preceding month, alluding to a slowdown in hiring. Interestingly, forecasts for official overall nonfarm and private-sector payrolls paint the opposite picture, showing hiring will accelerate.