Euro In Range Ahead Of Spain Auction: April 19, 2012

Euro remains in range as markets are cautiously awaiting an important bond auction from Spain today. Tuesday's bill auction was a success with strong demand and yield dropped back below 6% after that. But investors see today's auction as a real test of market confidence. Spain targets to sell up to EUR 2.5b of 2014 and 2022 bonds today. Yields are expected to rise and the focus is indeed on the demand. Anything below the relatively small target of EUR 2.5b would be seen as a big disappointment and could trigger sharp sell-off in Spanish bonds and euro.

It's reported that IMF chief Lagarde has so far secured $320b of funds so far ahead of G20 meeting, where she's targeting $400b. There was additional commitment of $34b, including $8b from Poland and "a substantial amount" from Switzerland. That adds to $200b from eurozone, $60b from Japan, $10b from Sweden, $7b from Denmark and $ 9.3b from Norway. US has rejected to comment but Treasury Geithners's comment has changed that he dropped that rhetoric to ask Europe to do more first. Instead, Geithner said that US is "actually very supportive of that process and we'll be very supportive of it this week."

In a separate report, IMF warned that financial stability in the eurozone could be jeopardised by drastic contraction of European banks' balance sheets by as much as $2.6T over the next 18 months. IMF studied 58 major European banks and under this baseline scenario, eurozone GDP would be 1.4% lower than now expected after two years. IMF warned "it is essential to continue to avoid a synchronized, large-scale, and aggressive trimming of balance sheets that could do serious damage to asset prices, credit supply, and economic activity in Europe and beyond."

BoJ governor Shirakawa reiterated that the bank is "fully committed to continuing powerful monetary easing through various measures, including maintaining the policy interest rate at practically zero and purchasing financial assets, until the current goal of year-on- year CPI inflation at 1 percent is deemed to be achievable." Shirakawa noted that the Japanese economy "has stagnated and the rate of growth is sub-par among the major economies." He said that low aggregate growth and fiscal holes are symptoms of "failure to adapt to the demographic reality." And, deflation is the result of "lower growth outlook impacting expected future income and hence current spending."

China's official Xinhua news agency reported that China will increase liquidity through further lowering banks reserve requirement ratio and open market operations. The report said that PBoC will "increase reverse repo operations and cut the reserve requirement ratio at an appropriate time ... to release liquidity," citing an unnamed official.

The report also noted that China will "take comprehensive and effective measures to make pre-emptive policy adjustment at appropriate time and pace so as to guide steady and appropriate growth in money and credit supply, to keep banking system liquidity at a reasonable level and to support stable and relatively fast economic growth." Markets are expecting another 100bps cut of RRR in Q2 to release additional CNY 800b liquidity and there could be another 50bps cut in Q3 to release CNY 400b of liquidity further.

On the data front, New Zealand CPI rose slightly less than expected by 0.5% qoq in Q1. Japan trade deficit came in wider than expected at JPY -0.62T in March. Australia NAB business confidence dropped to -1 in Q1. US jobless claims, Philly Fed survey, existing home sales and leading indicators will be featured later today.