With U.S. 10 year Treasury yields falling to a record low and the dollar up against all of the major currencies, it is clear that the desire for safety continues to drive financial markets. Ongoing concerns about the sustainability of Spanish finances has driven the greenback to a fresh 22 month high against the EUR and 17 month high against the CHF. EUR/USD touched a low of 1.2407 intraday and with no major support until the June 2010 low of 1.2150, the path of least resistance for the euro is still lower. In the latest chapter of Europe's sovereign debt crisis, Spain's 10 year bond yield rose above 6.7 percent today, a level that is quickly becoming unsustainable. As one of our colleagues in the industry described, Spain is slowly climbing the stairs of the liquidity hospital. They came up with a clever scheme to recapitalize Bankia but it was rejected by the European Central Bank because it would increase the risk on the ECB's balance sheet. The relative silence from European government officials can be both nerve racking and reassuring because it either means they refuse to act until Greece makes a decision about the euro or they are working around the clock on a solution to increase the region's firewall. It certainly doesn't help that European economic data surprised to the downside, adding pressure on the ECB. Until the silence is broken, the EUR/USD will not find any long term support.
Meanwhile U.S. pending home sales fell 5.5 percent in the month of April. Softer numbers were expected given the rise in March but this decline was far worse than anticipated. This report suggests that the momentum seen in existing and new home sales last month could begin to fade because pending home sales are a leading indicator for the housing market. Yet a soft pending home sales report will not be enough to convince the Fed to pull trigger on QE3. We would need to see a deeper slide in the asset markets, much slower job growth and a stronger contraction in consumer spending. Fed Presidents Dudley and Fisher are speaking later this afternoon. Dudley is a voting member of the FOMC and will most likely reiterate his recent view that for the time being, more easing is not needed. The end of month is quickly approaching which means that month end flows will come into play. Based on the sharp slide in U.S. equities this past month, fund managers will need to buy dollars to rebalance their portfolios.